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Obama, Bernanke and Yellen Rigged the Bond Market. Now it’s Trump Turn to Dance or be their Dunce! – By Michael Carino

Courtesy of ZeroHedge. View original post here.

Government dysfunction is at its worst.  We voted them in.  We have no one to blame but ourselves.

Granted, the choices were abysmal. But the Republican and Democratic parties,

with no third party competition, can continue to run dysfunctional governments,

whittling away our dominant global position until the cracks of our broken government

becomes abundantly clear.  As a society,

we play right into their subterfuge of keeping us so upset at the other party,

we don’t see right in front of our own eyes the decay of policies created to reflect

the success and desires of just one party.  Polarized politics that take the best and

worst policies of one party instead of the best of both parties is destined to

end in a deep, painful recession and possibly a global depression.  Pathetically, America is chained to a wall in

Plato’s cave with half watching MSNBC and the other half Fox News since birth.  I fear changing the channel would be like Zhuangzi’s

seventh hole in Wonton instead of enlightenment.  We are stuck with the landscape in front of us

for now.

Since the dawn of politics, politicians have tried to

balance keeping themselves in office and destroying the competing politicians

while keeping the economy healthy and vibrant to ensure reelections.  Similar to strangling the golden goose to get

every last golden egg without killing the goose, politicians play the same game

with the economy.  Passing poor economic

policies to reward constituents without derailing forward progress in an

economy is a hard task and often leads to disastrous results.  In the US, when politicians pursue poor

economic policies down party lines, the results from poor performance is swift

and new politicians are elected.

The financial crisis of 2008 proved that poor economic

performance leads to significant political change. It also proved that when

pressed with a disaster, politicians can come together – though at the last possible

moment – and craft policies to remedy the situation.  But that harmonious bipartisan relationship

only lasted for moments.  Once the

systemic downward spiral stabilized, their cooperation ended.  The task to get the economy away from the

brink of a stabilized disaster and grow again fell in the lap of the Central Bank

and Fed President Ben Bernanke.

Central banks are supposed to be void of political influence.

 However, Alan Greenspan, Bernanke’s predecessor,

had just retired and most would argue let the economy run too hot for too long

with an extremely easy monetary policy.  Was

Greenspan less of a monetary hawk, ignoring growing excesses to avoid shallow

downturns that are part of a normal business cycle because he was about to

retire?  A younger Greenspan surely

wouldn’t have been so timid on the monetary policy front.  Did he care about his legacy and didn’t want

to see a downturn until he left office?  Or was it less ego driven and more political


Central banks are typically independent, and therefore, not

viewed as a governmental puppet funding doomed policies regardless of merit.  If not independent, attracting foreign capital

becomes difficult since the track record shows a cohabiting relationship fails

in the long run.  But political influence

can be hard to avoid, especially when hounded by politicians daily, not to

mention handpicked by the political party in power.  Greenspan was blamed for having too

restrictive of a policy on George Bush Sr.’s watch and used as a scapegoat when

not reelected.  When George Bush Jr. was

running for reelection, it seemed this point registered and Greenspan remained accommodative

keeping rates too low for too long.

Following right along with this influential creep over the Central

Bank, a visit by the Fed to the White House used to be rare and is now

commonplace with a direct line of communication.  As Bernanke took office, it was obvious that

the divisive political landscape could not produce solid economic policies and the

Fed would be left to do the heavy lifting.  In order for Obama to fund his partisan

economic policies, while attacking his political opponents (finance, healthcare

and traditional energy sectors), he needed the Fed’s help.  Bernanke accommodated, bringing rates to zero,

deprive savers and instead encourage borrowing and bringing future growth

forward to offset Obamas policies. Sure, Bernanke could have maintained a

rational higher rate monetary policy.  We

would have suffered a shallow economic recession and politicians would have

been forced to work together on good economic policy for all to escape another

downward spiral.  But Bernanke was not a self-thinking

maverick.  No, he was an academic that

loved to be loved and took the easy way out.  This ensured the status quo would continue on

his watch leaving destructive problems bubbling under the surface.  Next came Fed Chairman Yellen. After years

under Bernanke as the Vice Chairman of the Fed, she knew the cost of low

interest rates and trying to accomplish more than rational monetary policy can produce.

 She decided not to have these issues unwind

on her watch and continued funding poor economic policies to ensure

continuation of what is now the longest expansion, albeit a slow expansion, in

the US.

It’s easy to show Yellen knows the costs to a prolonged low

interest rate policy.  When Yellen was

the President of the San Francisco Federal Reserve, they created a web based

game “Chair the Federal Reserve”.  In it,

you as the Chair of the Fed can set monetary policy. In all instances, setting

low interest rates for a prolonged period leads to high inflation. (Give it a

go at…).

The problem with funding poor economic policies with low

interest rates – or outright monetization of almost 5 trillion dollars of debt -

is eventually you run out of reasons to keep rates artificially low.  The Feds purchases amount to approximately the

total debt we had in 2003.  Without the

Fed’s purchases, the US would not have been able triple its debt since then!  We now have decades of poor partisan economic

policy and a pile of debt that we will not be able to fund if interest rates

ever reverted to the historic mean.

There are many obvious reasons higher interest rates will be

destructive.  Public and private balance

sheets are bloated and cannot service higher levels of rates.  Certain multi-billion dollar hedge funds which

attracted capital holding hundreds of billions in fixed-income investments, leveraged

and riding the bond rally down to historic low yields – with a nod and a wink from

the Fed’s crony capitalism – have the potential to create systemic dislocations

when investors’ redemptions due to poor performance force an unwind of these

positions.  Some of these largest hedge

funds are already seeing evacuations taking place from the stewards of these

funds’ helms.  And when the international

community, which holds half the US debt, realizes the next crisis will result

in more debt issued and monetized by the central bank, not only will they avoid

our debt market, they will run for the hills.  This will result in a parabolic move higher in

yields, the dollar weakening and inflation limiting the response by the Fed.

Sound like the 1980’s all over again. It should.  History, after all, rhymes, if it doesn’t repeat.

Now it’s Trump’s turn.  His grandiose plans of make America great

again with expansionary economic policies that are badly needed are a catch-22.

 The Fed has managed and manipulated

interest rates significantly below market levels for so long, the cost of this expansive

policy will prove to be catastrophic if rates adjust higher.  The US can only bluff investors to keep

investing in these below market rates if they believe the next crisis is on the

horizon or they believe growth will continue to be slow keeping inflation

running around this 2% level.  Trump

faces two scenarios: continue down the path of slow and steady growth assisted

by Fed manipulated interest rates or pursue faster growth and suffer a recession

or worse from markets setting higher rates.  Will he dance and play the game that is set

before him, or pursue his agenda and end up being the dunce?

Yes, if Trump pursues a pro-growth agenda, sadly, it will

end with higher rates and an economic crisis.  Ironically, this sounds like a tried and

tested process to bring our politicians together and work in a bipartisan way.  Too bad it takes a crisis to make government

functional.  I hope our luck of working together

at the last moment only in times of crisis has not run out.

Investment veteran and published author, Michael Carino,

prophetically called the timing and amplitude of the recent move in global bond

markets publishing “Global Bond Markets – Skydiving Without a Parachute.”  Michael has spent the last 25 years managing

fixed-income hedge funds and trading of over a trillion dollars of investments.

 He is the CEO of Greenwich Endeavors, a

financial service firm.  He feels

compelled to get his unique and under-reported views on the markets out to the

public.  He hopes to assist your readers’

creation of wealth and limit your readers’ destruction of wealth.  It’s time a voice contrarian

to other self-interested, behemoth Investment Managers’ voices are heard.

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