Suppose we have an island with no industries apart from fishing in the bay, and a benevolent mine owner who stamps and loans metal currency. On this island, at a given moment in time, we have two competing businesses, working different parts of the bay. We have stockholders in and lenders to the two fishing companies, we have employees with a steady income, we have private-sector consumer loans, and we have risk-free bonds issued as retirement securities by the benevolent currency monopolist. So we have a mix of loans of different types, held by people with different risk tolerances and growth hopes.The currency monopolist is willing to make overnight loans to industry. So each fishing company can borrow at a rate that is set each night, and varies according to a goal of price stability by the currency monopolist (presumably to prevent fixed-rate long-term lenders or borrowers from going broke). If a fishing company develops an innovation that increases their productivity, this will increase their daily production. So they will seek to borrow money to buy units of bay area to work in open auction, at whatever interest rate their production can cover after acquisition costs. And the competing fisherman will sell when their mix of productivity on bay parcels, and overnight mortgage costs to keep those parcels, are unfavorable compared to the immediate sale price to a fisherman with a more productive innovation.So suppose at a given moment the currency monopolist has issued 100 risk-free long-term fixed-rate bonds paying 5%. And there are also 200 long-term fixed-rate bonds issued 100 each by each fishing company at 7% or risk-free rate plus 2%. Suppose there is some new automation innovation by one fishing company, that increases the production of fish while leaving some people unemployed. This will result in a decrease in the price of fish, and a possible default on some fixed-rate loans such as by the fishing company without the innovation. The currency monopolist could lower the overnight rate to find a new equilibrium of the innovator company buying up more of the bay, the price of fish rising slightly from the money supply rising relative to the higher quantity of fish, and the employees getting paid a slightly lower wage. This will result in a gradual transfer of everything to the innovator company from the less innovative company, including employees and parcels of bay area.Alternatively, the innovator company could expect an innovation to come to fruition in the near future. So they might start to borrow heavily to buy parcels of the bay, in anticipation of a rise in fish production a few months out. This would increase the money supply without the supply of fish increasing immediately. The supply of fish might drop, as more employees are allocated to building the new infrastructure rather than to fishing. In this case, the currency monopolist would want to raise the overnight rate, forcing the innovator company to invest less, and discourage fish consumption by taking more loans from the private sector. As interest rates rose, the less innovative company would be forced to sell off pieces of the bay which can no longer produce enough to cover the overnight mortgage, when they cannot afford to attract more capital by borrowing in the private sector, because they have no hope to pay it off with the new fish-magic infrastructure of their competitor.So suppose the innovations come to fruition, and the price of fish drops, as in the first scenario, as does construction spending and employment. The currency monopolist would need to lower the overnight rate, to increase the money available for employment, coupons on private-sector loans, and propping up the price of fish. Now we find ourselves at our point where there exist outstanding 100 risk-free bonds, and 100 private-sector loans to each fishing company. Investors will look to shift their loans between the risk-free and growth investments, depending on the potential for innovation from each fishing company. If there is no hope for innovation they will shift money away from the fishing companies and into the risk-free bonds. This will cause the money supply to drop, as money returns to the currency monopolist, and interest rates to go down.But limiting the drop in interest rates, will be the possibility of another wave of innovation and investment. Nobody wants to buy too many long-term fixed-rate risk-free bonds, which will lose their value if interest rates rise. People will be locked in, and will not have money to invest in the infrastructure for the next productivity improvement. The possibility of a productivity improvement, by one company or the other, will support equity and debt investments at a higher rate of return, and keep money in the private sector. There is a chance of a huge and inevitable payoff, sooner or later. In particular, people will want and be willing to make equity and floating rate investments pegged to the risk-free rate.But what happens if the currency monopolist decides that propping up the price of fish is so important, that they a) buy back some of their risk-free bonds, and/or b) make fixed-rate long-term loans to the fishing companies? In the first case, some of the demand for risk-free long-term investments will go to the fishing companies. These investors will do so only with an agreement from the borrowers, that they concentrate on steady production, rather than risky projects. In the second case, the long-term loans will guarantee the viability of the less productive company, even if the competitor comes up with a new innovation to invest in. The currency monopolist cannot force the less productive company to sell to the growth innovator by raising the overnight rate. Because the non-growth company has a fixed long-term mortgage rate on parcels of the bay.And so lenders will become less willing to invest in the growth and innovator company, knowing that their inability to buy additional parcels of bay, or even to lure employees, will be limited. The increased prospects for a non-growth company actually caps the prospects of a growth innovator. The low-growth company has been immunized against the risk of low growth and innovation. And the rewards to innovation, relative to steady production, have been reduced. So the total investment will drop, and growth and innovation will drop. And some jokers will come along and call it "secular low growth." Interest-rate risk is needed to guarantee capital and labor can migrate from low-growth to high-growth companies, to reward innovation.The low-growth company cannot lend their money to the high-growth company, or sell their bay parcels and pay off their loans early, without angering their risk-free investors. And the high-growth company cannot hope to profit as much, through innovation, when the low-growth company - now a financial company - will bargain to keep most of the profits from their bay monopoly, made possible with a low fixed-rate mortgage. At the very least, the low-growth company will have no need to innovate, to meet their financial mission and obligations. And nor will people with long-term horizons be forced to invest in the high-growth company, in hopes of having anything left at all in their portfolios when overnight interest rates rise and the low-growth company falls behind in innovation.So now we have 50 risk-free bonds at 0%, 150 in long-term fixed-rate loans to the established company at 2%, and 100 in overnight loans to the innovator company at 2% (facing a long-term fixed-rate borrowing cost of 5%). The established company controls 60% of the bay, and there is no way they can be forced to sell parcels or innovate. Nobody wants to invest as much in the innovator company, because they cannot buy new bay parcels to implement their innovations, and if they do most of the profits will go to the established company anyway. And the established company looks like a growth company because their stock price has soared even as their revenues have flat-lined.And so we see how eliminating interest-rate risk in the private sector stifles the migration of resources to high-growth ventures. Rather than encouraging people to take risks to achieve duration, it increases the duration and present value of existing investments, and decreases the upside rewards to growth and innovation. It is the result of the currency monopolist being benevolent, and willing to take a loss from interest-rate risk to achieve price stability, rather than investing for maximum growth and profit. It frees the duration-demanding private sector from having to defend against interest-rate and innovation risk through growth and competing innovation.

Jesus, caffeine is a freakshow.

QuoteWednesday, March 5, 2014 - 20:30 SF Fed Williams: Rate Sensitive Sectors Improved Most Since 08By Karen Mracek--Sectors Not Sensitive To Rates 'Still Relatively Depressed'--Fed Has 'Added Colossally' To Its Balance Sheet Since RecessionSEATTLE, WASHINGTON (MNI) - San Francisco Federal Reserve Bank President John Williams said Wednesday interest rate sensitive markets have rebounded better than sectors not as sensitive to rate changes."Auto sales are pretty close to where they were before the financial crisis. Home sales and construction - though they're nowhere near as strong as right before the crash - are the areas of the economy that have improved most," Williams said in text prepared for a speech at Seattle University."If you look at sectors that aren't sensitive to interest rates, like services, or non-durable goods, they're still relatively depressed," he continued. "They've come back from the lows they hit, but haven't recovered in the same way as interest-sensitive sectors have."People say "the end of growth." But it is not some deep thing. You are not going to get revolutionary growth in autos! You are going to get it in services and non-durable goods. Our greatest growth companies - Google, Apple, Facebook - do not borrow a lot of money!When the Fed is willing to take a loss to shoulder interest-rate risk, it slows down the migration of resource allocation. Things like real estate and human resources are more scarce over a longer timeframe when they are being consumed by low-growth-potential sectors.Why am I going to risk my money on Biotech Equity For The Year 2040, when some car company is guaranteed to be able pike along with some fixed 30-year rate, even if they have zero growth and are cost-cutting by laying people off? Why is some company going to take risks and do new things, when most of his investors are low-risk people who were pushed out of treasury bonds by the Fed?It is not demand for duration or extra savings alone that pushes people into growth investments. It is demand for duration combined with interest-rate risk. It is the fear that a flatline company which cannot shoulder interest-rate risk could slip below even two years out if interest rates rise.

I hope Yellen is not as smart as they say she is. Pretty soon we will be making nothing but widgets.

Radio Shack is closing 1,100 stores. They sell widgets. Back in 2011, after doing a stock buyback, they issued hundreds of millions of dollars in 8-year debt. Thanks to whom? Ben Bernanke.And so I ask you, could not something better have been done with those 1,100 retail spaces, between then and now? Something with a chance to grow?Heinz is closing a ketchup plant in Canada. This after selling $3.1 billion in bonds last March. Could not those 700 plant workers have found something more productive to do, between then and now?QuoteStrong demand for the ketchup maker's offering also allowed the seven-and-a-half year notes to price at a lower interest rate than expected, with a coupon, of 4.25%, down from earlier expectations of 4.5%.The offering's price was the lowest recorded for a bond tied to a leveraged buyout in the U.S., according to S&P Capital IQ unit LCD. The last record low price for an LBO bond offering was a coupon of 6.375% obtained separately by both Cequel Communications LLC and Vivint Inc. in the fourth quarter of 2012, according to the S&P unit.The size of deal for Heinz was increased by $1 billion from the original size of $2.1 billion planned after the company reshaped its plans for borrowing to finance its buyout by 3G Capital Partners Ltd. and Berkshire Hathaway Inc., BRKB +1.17% Heinz said in a statement. Initially it was also going to sell loans denominated in euros and loans in sterling.These companies suck. THEY DO NOT GROW. Thank you Ben Bernanke you dipshit.

Here is another great QE growth story. So far as I can tell, Family Dollar dollar raised more than a third of their capital as a 5% 10-year bond issue in the middle of QE2.Quote(Reuters) - Family Dollar Stores Inc (FDO.N), seeking to reverse declining sales and profit, said on Thursday it would it would cut jobs, shut hundreds of underperforming stores and slash prices.The discount retailer, which caters to lower income shoppers, many of whom live paycheck to paycheck, reported a 35 percent decline in profit in the quarter that ended March 1, while sales at stores open at least a year fell 3.8 percent. It expects same-store sales to decline this quarter, too.Family Dollar operates convenience stores in the rural Obama-voting areas, and is frequented by foodstamp users on foot and bicycle who are too lazy to walk to a bus stop to Walmart. So it is the perfect intersection of Obama and Bernanke's stimulus policies.QuoteA bright spot for Family Dollar were strong sales of frozen food and tobacco products.