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Fator Securities Market Commentary: Go All In On Bernanke's Weak QE3 Hand

Tyler Durden's picture





 

From Brian Rogers of Fator Securities

QE3, coming to a market near you

QE2 succesful?

To have more QE or to not have more QE, that is the question.  With apologies to the Bard, that is generically the question all investors are asking regardless of the asset class(es) they trade.  Whether or not QE2 is behind the recent bout of food price inflation that is making its way around the globe is debatable.  What isn’t debatable is that since Federal Reserve Chairman Ben Bernanke announced his intention to launch QE2 at Jackson Hole, WY on August 27th, 2010, asset markets  have rallied in impressive fashion.  All asset markets that is except US Treasury debt which has seen yields widen significantly, for example 10yr Treasury yields have widened from 2.644% on 8/27/10 to 3.637% today, almost 100 bps.  Since the current low coupon on the 10yr is pushing out the duration of these bonds to around 8.5yrs, investors in US Treasury 10yrs have taken unleveraged losses of almost 8.5% over the last 5 months.  This is a disaster in the normally staid world of Treasury investing.  The story is even worse in the 30yr bucket where bonds have widened from 3.689% in late August to 4.727% today.  With the longer duration of about 16.5yrs, 30yr Treasury bond investors have taken quite a beating since Mr. Bernanke started buying bonds to support lower yields.  And now Tim Geithner’s Treasury is contemplating issuing 40, 50 and even 100yr bonds.  The notes of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association says that, “…significant demand exists for high-quality, long-duration bonds from entities with longer-dated liabilities.”  (link here)  Good luck with that one!

However, if we suspend reality and pretend like the sell-off in Treasury bonds isn’t something to be quite worried about, other asset markets have posted extremely strong returns.  Stocks, corporate bonds and commodities have all rallied hard since late August 2010.  Much, if not all, of this price appreciation has been attributed to the “magic” of QE2 injecting billions of liquidity into the market.  The problem the Fed and Chairman Bernanke now face is that the so-called wealth effect of the rising stock market has been dependent on the existence of QE2 and removing that punch bowl could cause the party to end and reverse the gains, both economic and market, that we have seen in the last 5 months.

In addition to the reversal of the wealth effect, there are two other reasons why I think the Fed will be loathe to remove QE.  The first is the huge benefit (from the government’s perspective) of creating an inflation problem for China which will eventually force the Chinese to strengthen the Yuan.  Congress has been pressing for harsher measures to force the Chinese to strengthen the Yuan (link here) for years and QE2 is turning out to be exactly the kind of pressure that just might work.  I’ve long argued that this is a case of be careful what you wish for because the second the Chinese allow the Yuan to strengthen materially, the prices for everything that we buy from China (which is basically every single item on Walmart’s shelves) will rise an attendant amount.  Mr. Bernanke doesn’t see any inflation now but he certainly will when the Chinese begin sending it back to us via an appreciated Yuan.

The other reason why QE is going to be with us for a long time is the ongoing need to support the massive size of monthly Treasury issuance.  With the US expected to run a $1tr - $1.5tr deficit this year and another $2.5tr in maturing bonds to roll, there is very little chance that the US could continue to issue bonds at the current low rates without huge support from Mr. Bernanke’s POMO operations.  Our total new borrowing and refunding needs will be greater than $300bn per month which is simply astronomical.  Even bond investing legend Bill Gross is calling the US Treasury a ponzi scheme (link here).  If Bill Gross isn’t buying Treasuries who is?

Playing poker with the Fed

Anyone who has ever played Texas Hold’em poker knows that the secret to winning is not just playing your own cards well but understanding how others are playing theirs.  With this thought in mind, let’s consider the tells that the Fed has recently given.  First, Mr. Bernanke has said for some time now that the recovery that we are currently experiencing in the US is going to take a long time to build strength.  The job market is being particularly stubborn and some even argue that the “natural” rate of unemployment has risen (link here).  During his speech yesterday at the National Press Club, Mr. Bernanke had the following to say about the current economic situation we face,

“The economic recovery that began in the middle of 2009 appears to have strengthened in recent months, although, to date, growth has not been fast enough to bring about a significant improvement in the job market. The early phase of the recovery, in the second half of 2009 and in early 2010, was largely attributable to the stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and a strong boost to production from businesses rebuilding their depleted inventories. But economic growth slowed significantly last spring as the impetus from inventory building and fiscal stimulus diminished and as Europe's debt problems roiled global financial markets.” (link here)

 

And…

 

“While indicators of spending and production have, on balance, been encouraging, the job market has improved only slowly. Following the loss of about 8-1/2 million jobs in 2008 and 2009, private-sector employment showed gains in 2010. However, these gains were barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly reduce the overall unemployment rate.”

With this thinking in mind, that the challenges we face economically aren’t about to go away anytime soon, let’s take a look at what Fed hawk Thomas Hoenig had to say about QE2 recently, from Reuters,

The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data proves weaker than expected, Kansas City Fed President Thomas Hoenig said.  Another round of bond buying "may get discussed" if the numbers look "disappointing," Hoenig told Market News International in an interview published on Tuesday.  (link here)

If you blinked you may have missed it but the man at the Fed who has been famous for his hawkish stance on the Fed’s balance sheet expansion, Kansas City Fed President Thomas Hoenig, just admitted that if the data remained weak, the Fed would consider extending QE.  Then yesterday, Bernanke said that “economic growth slowed significantly last spring” and the recent gains in the job market are “barely sufficient to accommodate the inflow of recent graduates…”  In other words, we’re running to stand still.  To my mind, when you add this up, you end up with the Fed tipping their cards a bit and revealing their hand.  QE is here to stay.  Whether you call the next round QE2 lite or QE3 is irrelevant, the Bernanke put is here to say.

In other words, to put it back into poker terms, the Fed is playing as if they have a pair of aces, however, with economic and job growth slowing and long-term Treasury yields rising rapidly, the Fed is actually holding 2-7 off-suit (the worst hand in Texas Hold’em poker) and telling us as much.

How to play Ben Bernanke’s poker face

The bottom line, if I am right about QE continuing ad infinitum, is that hard assets like commodities and claims on hard assets like corporate bonds and stocks, will continue to surge confidently with the Bernanke put providing support.  This is not to say that stocks will go straight up and sovereign debt straight down, they certainly may reverse course over the short-run, but the trend is your friend and your new motto should be “Buy the dip.”  Mr. Bernanke does not bluff, he has spent his whole career studying the Great Depression and is convinced the situation was made worse by the Federal Reserve not supplying enough liquidity.  He is determined not to repeat the mistake this time around.

In Brazil, we would recommend the following names to take advantage of the 2-7 off-suit Mr. Bernanke is holding:

  1. Petrobras (PETR3/4 and PBR) – Love it or hate it, oil is going up and PBR will benefit, don’t fight it.
  2. Port concessionaires like Wilson, Sons (WSON11), Santos Brasil (STBP11) and Log-in (LOGN3) – Infrastructure spending, growth and pricing power make these names attractive.
  3. AmBev (AMBV3/4 and ABV) – Rising salaries and low unemployment bode well for this beverage king.
  4. Utilities Copel (CPLE6), Light (LIGT3) and Cemig (CMIG4 and CIG) – Defensives that will do well as emerging markets continue to underperform.
  5. Telecom names like Vivo (VIVO3/4) and Telesp (TLPP4), Contax (CTAX3/4 and CTXNY).
  6. Confab (CNFB3/4) as a good play on Petrobras capex which also has contracts which allow it pass along input price increases; very important during times of rising inflation.
  7. Marcopolo (POMO4) – Great visibility for bus production going out for years in everything from school buses, urban buses or buses for Olympics/World Cup.
  8. Valid (VLID3) – Leader in every market they participate in with strong barriers to entry
  9. Localiza (RENT3) – Car rental firm with strong management and excellent growth prospects from rising economy and Olympics/World Cup.

Have a great weekend and go all-in on Bernanke’s weak hand!

* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a subsidiary of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

This material was not prepared by Fator Securities LLC.. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.

 


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Fri, 02/04/2011 - 18:06 | Link to Comment LongSoupLine
LongSoupLine's picture

Almost every one of the 9 recommendations at the end of the article use commodities in their business.  What do you think is going to happen to margins when all those commod's are through the roof after QE3/4/5/6/7?  Can you say "compression"?

(i.e.- AmBev? hello?..aluminum, wheat, barley, hops, grain, yeast).

Fri, 02/04/2011 - 19:09 | Link to Comment Panafrican Funk...
Panafrican Funktron Robot's picture

For real.  Stronger "economy of scale" retailers like Wal-Mart aren't going to stand for pass-through without vendor pain.  A&P was the canary, weak retail is getting absolutely slaughtered on margins and that will eventually hit earlier in the chain.  The last shoe will be a softening in physical demand for commodities.  It's coming, I'm sure of this.

Fri, 02/04/2011 - 19:54 | Link to Comment 11b40
11b40's picture

Vendor Pain!  It's here--right now.  Every vendor I deal with has cut, cut, cut just to maintain share.  The Retailer has the upper hand, and will walk away from entire categories if their margins become too compressed.  The world is awash in cheap consumer goods and many vendors are getting desperate again.  The price increases are coming, but no one wants to accept them.  I have been a retail broker for over 30 years, and it feels like another shit storm is just over the horizon.  The consumer stepped up in 2010, and retailers managed inventories extremely well, but it is starting to fell like another consumer fade in the home furnishing industry, especially with retailers dependent on moderate to low income shoppers.  You know, it's that non-core inflation thingy we don't like to talk about.

 

Independent Contractor

Fri, 02/04/2011 - 23:27 | Link to Comment holmes
holmes's picture

There are a few categories that can get away with raising prices and are not suffering margin compression--urinal cake manufacturing comes to mind.

Sat, 02/05/2011 - 12:21 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

but it is starting to fell like another consumer fade in the home furnishing industry

Shhh, don't tell Harry...

Sat, 02/05/2011 - 21:03 | Link to Comment hangemhigh
hangemhigh's picture

deleted by poster

Fri, 02/04/2011 - 18:07 | Link to Comment traderjoe
traderjoe's picture

QE to Infinity and Beyond!

Fri, 02/04/2011 - 18:21 | Link to Comment unwashedmass
unwashedmass's picture

 

gold

silver

gold

silver

gold

silver

gold

silver

gold

silver

buy silver, crash JPM

Fri, 02/04/2011 - 18:38 | Link to Comment dearth vader
dearth vader's picture

Slightly OT, but worth of notice:

"The situation in Egypt and the reaction of GCC countries...might present gold with a new dynamic," says Natixis, noting both that private gold demand in emerging nations is typically driven by economic growth and also that the Kuwaiti government this week "decided to hand out" some US$4 billion in cash and $1bn-worth of food to its 1.15 million citizens. "Were other countries to follow this lead, we might expect a substantial increase in household income and spending in the region, which would be clearly beneficial to Middle East demand for gold."

Rioting in Kuwait? Fuggedaboudit

http://goldnews.bullionvault.com/gold_silver_020420112

Fri, 02/04/2011 - 19:24 | Link to Comment bankrupt JPM bu...
bankrupt JPM buy silver's picture

Yes, yes ,yes! Silver.

Check out NIA's video latest on my blog just launched.

http://silvergoldsilver.blogspot.com/

Fri, 02/04/2011 - 18:11 | Link to Comment Yen Cross
Yen Cross's picture

Slightly off topic. Remember how pissed off The Bank of Japan got late last year. Why? JGB buying to drive the YEN down. Who was the culprit? CHINA!!!!!!!!!!!!!!!!

Fri, 02/04/2011 - 18:13 | Link to Comment medicalstudent
medicalstudent's picture

some shrewd individuals have stated it takes 1.5-3 years before velocity dilutes the pool after inflation is created.

 

many price moves could still disturbingly be from QE1.

Sat, 02/05/2011 - 12:24 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

Which means Gen'al Ben has ZERO percent chance of preventing hyperinflation once that tipping point dollar is printed...

Fri, 02/04/2011 - 18:18 | Link to Comment ShowMeTheTime
ShowMeTheTime's picture

1. We need new shirts that say "QE" and the infinity sign..

 

2. Just to play devil's advocate, do you think Ron Paul as sub comittee chair and up the FED's kiester will have any sway in stopping future QEs?

Fri, 02/04/2011 - 18:26 | Link to Comment chet
chet's picture

I think if R. Paul starts to cause real problems the GOP leadership will neuter him somehow.

Fri, 02/04/2011 - 18:59 | Link to Comment ZerOhead
ZerOhead's picture

Vegas odds;

Shot by disgruntled constituent  2-1

Found with dead hooker  3-1

Barney Frank sexual molestation charge  5-1

Fri, 02/04/2011 - 21:08 | Link to Comment Hulk
Hulk's picture

Great to see you back ZerOhead, where have you been?

Sun, 02/06/2011 - 08:20 | Link to Comment Hephasteus
Hephasteus's picture

Man when Banzai holds a seance he doesn't fuck aroun does he.

Fri, 02/04/2011 - 21:21 | Link to Comment Rick64
Rick64's picture

 Missed your humor.

Fri, 02/04/2011 - 19:29 | Link to Comment I Told YOU So
I Told YOU So's picture

PAUL

or looking at it another way, why was he "allowed" to be the pain in the ass that he is (to them), again what purpose does (or will) he REALLY serve ( willingly or by subterfuge )

Sat, 02/05/2011 - 14:02 | Link to Comment Saxxon
Saxxon's picture

To the Magisters, Ron Paul and his son, etc. are merely relief valves.

The best way to play this is the way you don't want to see it; i.e., no change, no uprising, just a slow managed sinking of Debtship America and its mostly ignorant majority.

Orthodoxy always wins, in this world.  Look at history, assuming even a part of it is reliable more or less - most people are enslaved most of the time, to orthodoxy, superstition and to the more quick and intelligent among them.

Fear of death is the ultimate driver.  Actual revolutions are accomplished when enough people are no longer afraid to die.  That alone can defeat the magisters.  Where is the U.S. on that continuum?  Nowhere near.  Position yourself accordingly.

Fri, 02/04/2011 - 18:18 | Link to Comment Yen Cross
Yen Cross's picture

No offence. Stick to scapels.

Fri, 02/04/2011 - 18:20 | Link to Comment Yen Cross
Yen Cross's picture

Or pick up some history books!

Fri, 02/04/2011 - 18:22 | Link to Comment buzzsaw99
buzzsaw99's picture

Egad.

Fri, 02/04/2011 - 18:29 | Link to Comment Yen Cross
Yen Cross's picture

Good man. Thanks

Fri, 02/04/2011 - 18:24 | Link to Comment kengland
kengland's picture

Christ....robo has been saying the same facking thing now for 18 months yet you pinheads like it better when it spoon fed to you by "professionals." No different that a jr high lunch room bunch

Fri, 02/04/2011 - 18:23 | Link to Comment unwashedmass
unwashedmass's picture

 

not that anyone cares, but the peasantry is going to realize that THEY -- not the titans of Wall STreet -- are going to be stuck paying off all good time Ben's largesse....

so, which city do we think will look like Cairo first? NYC? Boston? Chicago? Miami? LA?

 

Fri, 02/04/2011 - 18:32 | Link to Comment ArkansasAngie
ArkansasAngie's picture

Detroit.

Ooops nobody lives there any more.

Fri, 02/04/2011 - 18:44 | Link to Comment Logans_Run
Logans_Run's picture

I thought Detroit was part of Canada now?

Fri, 02/04/2011 - 18:50 | Link to Comment Yen Cross
Yen Cross's picture

Do ya live on the peninsula?

Fri, 02/04/2011 - 18:33 | Link to Comment El Hosel
El Hosel's picture

  ....so, which city

         I'll take Miami

Sat, 02/05/2011 - 01:54 | Link to Comment StychoKiller
StychoKiller's picture

My money's on Chicago or NYC.

Sat, 02/05/2011 - 14:05 | Link to Comment Saxxon
Saxxon's picture

No; they'll just be put to sleep with a Soma mist, like in Brave New World: "Friends, friends . . . why are we fighting . . . ?"

 

Sat, 02/05/2011 - 09:43 | Link to Comment DeadFred
DeadFred's picture

DC, Lafayette Park, Spring 2013.  Be there or be square.

Fri, 02/04/2011 - 18:31 | Link to Comment Math Man
Math Man's picture

"The first is the huge benefit (from the government’s perspective) of creating an inflation problem for China which will eventually force the Chinese to strengthen the Yuan. "

 

Let's get something straight.  US QE is not causing Chinese inflation.  QE is increasing US bank reserves, but the banks still aren't lending.  Hard for that QE money to make it China when it's still sitting on the balance sheet.

Chinese inflation is being caused by China's monetary policy, NOT by US QE.

Many Zerohedge readers are making a big mistake by assuming QE is causing inflation. 

China has no choice but to continue to tighten. 

And as they do, the 'inflation' that you guys blame on QE will start to decline, and so will a lot of other things (cotton, oil, gold, silver - pretty much anything commodity related).

Your precious commodity hoards are about to be worth a lot, lot less.

Fri, 02/04/2011 - 18:46 | Link to Comment cartonero
cartonero's picture

So the federal government isn't spending the $1.4 trillion deficit?

Fri, 02/04/2011 - 18:47 | Link to Comment blind squirrel
blind squirrel's picture

Math Man please go speak with Economics Man.  Of course QE is causing inflation for China.  First of all, oil is invoiced in USD so they are paying more for energy.  Second, they run a trade deficit with many other countries whose currencies are strengthening so they are importing inflation. You know this, right?  It's not even open for debate.

Fri, 02/04/2011 - 19:13 | Link to Comment rosiescenario
rosiescenario's picture

...not to mention all the WS $$$ going into trend following hedge funds whose algos are driving stuff like copper, cotton, etc through the roof.

 

I'd say QE is directly responsible for what we are seeing in commodities....the rocket launch of all of them only started after Ben came back from JH last year...before then it was more or less market demand driving them, with a bit of speculation thrown in.

Fri, 02/04/2011 - 19:50 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

Completely ridiculous.  

Go pull a 5 year chart on any commodity you wish, and then attempt to correlate QE with it. 

Fri, 02/04/2011 - 20:02 | Link to Comment Math Man
Math Man's picture

Neither of the things Mr. Squirrel mentioned are caused by QE.

China has an inflation problem because Chinese banks won't stop lending, it is their  reserves, not ours causing the problems.

 

 

Fri, 02/04/2011 - 18:52 | Link to Comment Tyler Durden
Tyler Durden's picture

Let's put down the textbook and get something even more straight:

  • The Fed is purchasing, i.e., giving to its trade counterparties, $125 billion in cash each month for securities purchased by said counterparties through reserve conversion and other forms of zero cost capital.
  • Banks will have $2 trillion in excess reserves by September. According to the the Fed's own calculations it can only tighten by about $1 trillion using conventional methods. Apply fractional reserve math to the balance, and discount it. Because if you aren't, everyone else on Wall Street is.
  • Read this from yesterday which apparently everyone who believes that reserves are some inert object, continues to ignore on purpose: Fed Excess Reserve Cumulative Deficiency Hits Record
Fri, 02/04/2011 - 19:12 | Link to Comment Yen Cross
Yen Cross's picture

I'll lay off the snarky remarks. We trade, and create wealth here.

Fri, 02/04/2011 - 19:47 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

using conventional methods...

The Fed has done nothing conventional for the past four years.  The Fed truly can - whenever it wants - put everything in reverse in 15 minutes.  It can smash inflation just ask quickly as it stopped the deflationary buzzsaw from slicing through our necks in 2008. 

  

Fri, 02/04/2011 - 20:22 | Link to Comment Sophist Economicus
Sophist Economicus's picture

Wrongo!!! Look at any long term
Interest chart. The fed reacts to market forces and tries to adapt. They can control their discount rates. But even in the volker days, he was chasing the curve most of the time

And, if the fed controls rates, how is that AFTER the announcement of QE2 last fall, rates went up??? Mortgage rates went UP?? That was directly contradictory to fed message at JH

Fri, 02/04/2011 - 20:38 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

Yes.  I agree.  The market sets rates (to an extent), and the best example of that is the one you provided after QE2. 

But are you trying to tell me the Fed is powerless in the market? Are you suggesting that if Bernanke unexpectedly makes an comment about tightening liquidity, the market will just shrug it off?  

Tell me which force was stronger in 2008/09/10:  deflation or the Fed?  

 

Sat, 02/05/2011 - 02:32 | Link to Comment Sophist Economicus
Sophist Economicus's picture

Not the fed! Are housing prices up? Commercial real estate up? Consumer loans up? Mortgage lending? Wages for average non- union ( pre negotiated packages) up? These were all directly targeted by the fed and have been absolute flops for them. Now they are talking up the markets.... Jury is out in my humble opinion at this point....but, I think the day of reckoning - one way or the other will come soon enough. I think Mr. B is gonna regret mentioning equities in that 60 minutes interview

Fri, 02/04/2011 - 23:43 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

Fed is fighting insolvency, not deflation.   Fighting deflation is the cover story.

Sat, 02/05/2011 - 02:01 | Link to Comment StychoKiller
StychoKiller's picture

All those CDS's are ticking away, like so many multi-billion $ (Euro/Yen/etc) time-bombs, waiting for the triggering event -- once enough of them ignite, insolvency is gonna mushroom and cause the Great Implosion.  You are correct.

Sat, 02/05/2011 - 09:56 | Link to Comment Zero Govt
Zero Govt's picture

"The Fed is fighting insolvency, not deflation.."

Yes ok but what is it fighting it with? More debt. The Fed is monetising debt, but money is debt (credit) in truth.

"The Fed can create inflation and stop it in an instant.."

BS. The Fed has zero control over the CPI, no means of telling retailers or their suppliers how to adjust their prices. Even with mortgages the Feds buying has done precisely zero to stablise the property market. The Fed cannot control inflation up or down nor by default deflation. They control the money supply, not the retail banks leveridge that outweighs the Feds money supply 40/1. 

Everyone has to realise the Fed is outweighed and outgunned overwhelmingly by debt (credit) in the economy. The Fed like Big Govt only chummies with Big Biz. 90% of the economy is small-medium enterprise not Big Biz over which these big farts have no control whatsoever. 70% of the US economy is consumer which again the Fed has no control over. The economy moves and the Fed (and Big banks) follow their actions, not control, them.

The Fed and Goldman Sachs has no control over enterprise. They are banks. Like Govt they folow they don't lead. Their game of (credit`) cards is over. Both consumers and business aren't playing anymore. Credit (more debt) is a busted flush and the 40/1 leverage is about to de-leveage (deflation) and there's fuk all these big windbags can do about it.

Sat, 02/05/2011 - 12:38 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

First, the Fed is not fighting insolvency - that's ludicrous.  If you haven't noticed, it has a printing press, and every Treasury auction is oversubscribed many times over, even at near zero rates.  We are the world's reserve currency, and as the world continues to de-leverage, it will require our dollars to do so. Do you think the world can de-leverage a quadrillion worth of derivatives using the Swiss franc, Norwegian krone or Cad$?

Even with mortgages the Feds buying has done precisely zero to stablise the property market....

Wrong. Without the Fed's influence, the housing and CRE markets would have fallen precipitously more. Likewise, because of the Fed, the bubble in housing and CRE was dramatically more pronounced.  For you to dismiss the Fed's efforts as inconsequential in both the upward and downward movements is entirely off the mark.   

They control the money supply, not the retail banks leveridge that outweighs the Feds money supply 40/1.

And this money supply is meaningless to you?  No influence on housing, credit, commodities, inflation, etc...?  The Fed can control anything it wants: money supply, leverage, risk, etc. It can force par for worthless AIG bets if it wants to. It can force banks to take $700B in cash and control how those banks pay it back. It can bail out foreign banks if it wants to.  It can put the entire $1T in reserves at the Fed under lock and key if it wants/needs to. 

You, and your brother who posted above seem to dismiss any influence the Fed has over our markets.  Apparently, it can't control rates, it can't influence inflation, it can't influence prices, it can't influence enterprise, it can't influence housing, it can't do (apparently) anything.  Ridiculous!  You portray the Fed as being totally peripheral to everything, and in control of nothing.  That's wrong.  The Fed chooses to be peripheral when it wants (most of the time), and it chooses to be a driving force when it wants (see the past 4 years).  The Fed can put a slipknot around the head of the inflation monster and yank it straight through its ass if it wants to.  We are not Zimbabwe; we are not Weimar, and World War is not the backdrop to our policies.  The Fed is intricately interconnected with every central bank on Earth, and, through concerted efforts, any inflationary shit-storms will be gunned down together, as you will see this year with food prices.    

The Fed has zero control over the CPI..

Just for clarity, you're telling me the Fed has zero control over inflation?  Up or down?  All these articles on ZeroHedge about the Fed being responsible for cotton/rice prices et al are wrong?

The Fed and Goldman Sachs has no control over enterprise...

Again, I need some clarity here.  No control over anything, right?  No control over the mortgage market or credit markets through securitization, right?  Similarly, the Lehman bankruptcy had no affect over enterprise, either?

In a nutshell, you're telling me the Fed or Goldman or any large Wall Street bank (all are one in the same, anyway) are not complicit in the day-to-day mechanics of our economy because they do not have a direct feed to small businesses or retailers, which is 90% (your number) of our economy.  That's bullshit.  One degree of separation does not dismiss influence, control or responsibility.  

   


Sat, 02/05/2011 - 14:05 | Link to Comment cdskiller
cdskiller's picture

That's exactly right, and doesn't get mentioned very much.

Sat, 02/05/2011 - 10:02 | Link to Comment DeadFred
DeadFred's picture

Right, inflation is the goal not the unintended consequence because it will put a bandage on so many of the looming issues.  I'm old enough to remember real inflation and once it permeated old mind-set it colored the way we saw the world.  It took decades for me to stop being surprized when I saw the price of something going down, not up.  A couple of years of significant inflation and no one would voluntarily walk out on a house with a 5% mortgage even if it is currently underwater.

Sat, 02/05/2011 - 01:12 | Link to Comment Muir
Muir's picture

"Let's put down the textbook and get something even more straight:

__

Inflation is always a monetary phenomena.

(or... the moneys gotta go somewhere's)

 

Sat, 02/05/2011 - 02:15 | Link to Comment davepowers
davepowers's picture

1. I wish you'd explore 'reserve conversion' in greater detail, esp. the total level of reserves doesn't reflect a huge conversion. Seriously, are the Banks withdrawing reserves to lend? Then why aren't lending volumes spiking? Can the banks loan against reserves in place? Ditto re: low loan growth? Or, can the banks somehow borrow against their in place reserves? That would, at least, explain credit inflation via reserve growth, although again, there's that pesky low loan growth data. Help us get this straight here.

2. Yesterday's article didn't refute or even claim that reserves are inert or 'ert.' It simply noted that reserve growth didn't match expansion of the Fed balance sheet assets. That's because the FED has gotten the difference elsewhere. It bespoke the FED's behavior, not the movement of reserves.

Sat, 02/05/2011 - 12:33 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

The money is leaking out in other ways besides bank lending...

Sat, 02/05/2011 - 14:04 | Link to Comment davepowers
davepowers's picture

how and in what ways?

please explain.

 

Fri, 02/04/2011 - 22:13 | Link to Comment Double down
Double down's picture

I agree.  You state facts.  

Your conclusion is unrealistic and naive.

What is the alternative to capital controls on PDs excess reserves?  Someone will blink and that will occur when we get an indisputably good data point.  It is the recover that will get us, not further declines.

 

Fri, 02/04/2011 - 18:31 | Link to Comment pat53
pat53's picture

Complete BULLSHIT !!  The new congress AND the American people are not going to stand for anymore money printing after QE2. Enjoy this one, its the last !

Fri, 02/04/2011 - 19:36 | Link to Comment Justaman
Justaman's picture

I hope you are right Pat (not sure you had sarcasm on) but this is America!  Over the past 60 years, we have lived on the gubmint dole and we are sooooo proud of it.  Last I heard, 43 Million on food stamps, 70% pensions underfunded with no adjustments yet considered, and munis are insolvent without levering again. 

What better way for the Fed to diversify their fixed income portfolio than to buy munis. QE3 = muni bailouts. We have to get B. Gross to drink the koolaid again, don't we?

 

Fri, 02/04/2011 - 18:35 | Link to Comment blind squirrel
blind squirrel's picture

Let's hope that together Plosser, Fisher, and Ron Paul can bring QE to an end.

Fri, 02/04/2011 - 18:37 | Link to Comment Yen Cross
Yen Cross's picture

Yea and the Fed transparancy will keep milking you. QE origional bailed out Major European Institutions.

Fri, 02/04/2011 - 18:40 | Link to Comment 6 String
6 String's picture

Strategically, if QE2 lives on, along with the put under the market, silver will outperform--especially if congress continues to do nothing about our structural debts, which they won't.

Everyone is just "hoping" in the mainstream that GDP can grow at 4-5%, unemployment is going to come way down, and they can curb are deficits to 18-19% of GDP with no hiccups whatsoever over the next couple years....

But they are indeed dreaming in hope-land. When states and pensions start to buckle--and they will--QE3 will be unleashed and hyperinflation will not turn back.

Sat, 02/05/2011 - 02:05 | Link to Comment StychoKiller
StychoKiller's picture

Congress/Senate DOES NOT have the 'nads to do any real cuts in spending (we'll be lucky to see cuts in the rate(s) of spending!).  They're gonna show up months too late and $Trillions short!

Fri, 02/04/2011 - 18:45 | Link to Comment Yen Cross
Yen Cross's picture

Ohh 6 string. I deeply appreciate your technicals. Fundamentally, however you're off. First of all your GDP forcast is overstated. On purpose. I might add. Deficit margin adjustments are not even within 5% of your micro projections. Yes I'm old. BUT I READ real time.

Fri, 02/04/2011 - 18:48 | Link to Comment Cdad
Cdad's picture

Don't mean to be rude, but I do not buy the QE infinity trade.  Between the national debt and bailout rage, to proceed with QE would be to commit Fed suicide, in my opinion.  I rather think they would scuttle the ship first.

I have said it before, and I'll say it again, the Fed has already bet its last chip [to stay within the metaphor]. 

As for the equity market, he is the mark at the table, he is drunk, and he has borrowed large from everyone at the table.  He has even less time than Banana Ben.

Cue the outraged, "QE forever" responses....who also claim the market cannot be sold [check JPM].

The [bear] fatalism on this site is beginning to wear on me.  Yeah, I know it has been tough...but seriously. 

 

Fri, 02/04/2011 - 18:51 | Link to Comment Yen Cross
Yen Cross's picture

You are anything but rude. Well spoken.

Fri, 02/04/2011 - 19:13 | Link to Comment Wynn
Wynn's picture

Isn't QE's main purpose to keep the banks solvent, as they continue to write down foreclosure losses?

Fri, 02/04/2011 - 19:22 | Link to Comment blind squirrel
blind squirrel's picture

ding, ding, ding,... you are our wynner

Fri, 02/04/2011 - 20:20 | Link to Comment Milestones
Milestones's picture
Err--Where does $135 Bn worth of bonuses play into your formula???       Milestones
Sat, 02/05/2011 - 02:08 | Link to Comment StychoKiller
StychoKiller's picture

Meh, it's hard work making sure that the curtain stays in place over this clusterfsck!

Fri, 02/04/2011 - 18:51 | Link to Comment chet
chet's picture

Federal deficit spending is now the economy.

There is no deficit spending without QE.

QE has to continue, or we have depression.

Therefore, QE will continue.

Even when the raving insanity of all of this becomes widely apparent, literally the ONLY choice available will be to do more QE.  Everyone will say its awful and it really should stop, and we'll keep doing it anyway, until the wheels come off.  We're in a parabolic debt blow-off.

Fri, 02/04/2011 - 19:05 | Link to Comment blind squirrel
blind squirrel's picture

We can run the deficits without QE.  Say we buy 12 million barrels of oil from the Saudi's at $100 per barrel, then they need to invest 1.2 billion every day.  There's no other market deep enough to take that flow except UST's.  And Abu Dhabi, Brunei, Korea, Singapore, China, etc all have the same problem.  Our deficits will be funded by petro dollars and Asian reserves.

Fri, 02/04/2011 - 19:39 | Link to Comment chet
chet's picture

It's an interesting point, but I'm not convinced.  Between new debt and roll over, we have like $4 trillion + to finance.  Are we still at a point where we could do that without the Fed?  Maybe.

Fri, 02/04/2011 - 19:36 | Link to Comment ZerOhead
ZerOhead's picture

Like an addict addicted to heroin, larger and larger increases in the amount of narcotic consumed are required to achieve the same feel-good effect until the respiratory system fails and the patient dies.

Vested interests will 'invest' profusely in our politicians to make sure there is no political will to check America into rehab.

If the Tea Party sentiment attempts to curtail spending those nasty economic withdrawl symptoms will scream for liquidity.

No one is going to stop the Bernanke IV drip.

No one... no how... no way.

 

Invest accordingly and have a nice day! :)

Fri, 02/04/2011 - 19:44 | Link to Comment chet
chet's picture

Yep.  And even though we know the smack is going to kill us sometime soon, when you are sitting there in horrific withdrawls and that needle is sitting right there filled with the only thing in the universe that can make you feel well, you really only have one choice. 

(Unless you are a man of steel, in which case you wouldn't be addicted to heroin in the first place.)

Sat, 02/05/2011 - 02:15 | Link to Comment StychoKiller
StychoKiller's picture

After a five-day stay in the local Hospital for pancreatitus, I experienced some withdrawal from the morphine/dilaudid.  It felt just like having low blood-sugar, i.e., the shakes!  At first I thought my blood-sugar was low, but testing revealed that was not the problem.  Pretty sure real withdrawal is probably much worse though!

Sat, 02/05/2011 - 05:17 | Link to Comment BigDuke6
BigDuke6's picture

The 2 main causes of pancreatitis are gallstones or excess alcohol.

 

Which was you boy?

Sat, 02/05/2011 - 12:40 | Link to Comment Bendromeda Strain
Bendromeda Strain's picture

He said he had the shakes, didn't he?

Fri, 02/04/2011 - 18:53 | Link to Comment alien-IQ
alien-IQ's picture

Playing with fire.

Fri, 02/04/2011 - 18:56 | Link to Comment Sancho Ponzi
Sancho Ponzi's picture

The 30 year treasury fell below 120 this week, breaking through a channel that had held since 1985. The more debt Ben buys, the uglier the 30 year gets. Don't underestimate this breakout if it holds.

Fri, 02/04/2011 - 19:03 | Link to Comment Cdad
Cdad's picture

Not sure...but isn't it the case that the Fed is buying 30s next week?  If I am right, and I am not sure, then this move today was probably frontrunning.  So as much as I would like to believe that the long end is about to tank [in value], which I think would put pressure key segments of the market, the question seems worth repeating....isn't Banana Ben going to buy 30s next week?

Fri, 02/04/2011 - 18:54 | Link to Comment 10kby2k
10kby2k's picture

 

Its like playing dare....driving two vehicles str8 at each other to see who will jump. The Fed is playing with FIRE and I think Bernanke will puss out and veer outta the game.  Or is this his vendetta for never being picked in the schoolyard for any game? Once a puss, always a puss....when the fire heats up he'll fold.

Fri, 02/04/2011 - 18:55 | Link to Comment proLiberty
proLiberty's picture

Can anyone suggest alternatives to going long the ultra-short inverse ETF TBT?

 

Fri, 02/04/2011 - 18:56 | Link to Comment Pecora
Pecora's picture

Your Bernanke poker motif is eerily similar, some would say a litte too similar, to this Matt Schifrin Forbes column of some weeks back:

http://blogs.forbes.com/schifrin/2010/12/28/buffett-next-door-adviceuup-...

You're reading Ben's tell incorrectly, though. He's repressing something he's afraid to talk about and that's not in the QE realm...I would strongly suggest you stay away from the Bellagio poker rooms.

Fri, 02/04/2011 - 19:00 | Link to Comment Sudden Debt
Sudden Debt's picture

Everybody keeps thinking that every QE will keep the markets going up.

But that's not exactly the case.

The market has now already calculated so much inflation into the share prices and future earnings that this rise will soon stop. I know it doesn't sound popular, but don't take everything for granted because the market never it. Even if it looks like a sure done deal.

 

 

 

Fri, 02/04/2011 - 19:05 | Link to Comment Yen Cross
Yen Cross's picture

This is a trick question. Right?

Sun, 02/06/2011 - 10:50 | Link to Comment Sudden Debt
Sudden Debt's picture

No it's not!

 

Stocks are going higher and higher but their PE isn't following.

Earnings don't justify another 25% rise in stocks.

 

The sheep will learn this soon the hard way.

Fri, 02/04/2011 - 19:03 | Link to Comment 10kby2k
10kby2k's picture

And the average retirement portfolio  is near 50/50.  So 50% of ur portfolio gains 50% and the other 50% loses 20%.  That outcome nets you a 15% return.  So its the brokerage firms and hedgies that make a full 50% (maybe 150% w/ leverage). We have a fucked up society. Then when the markets turn the masses will be crushed. 

These are dangerous times and there is no 'out' for the faint of heart. 

Its Bernankes 2 - 7 versus your 2 - 7.

Fri, 02/04/2011 - 19:05 | Link to Comment dick cheneys ghost
dick cheneys ghost's picture

wikileaks; US agrees to tell russia nuclear secrets about britian. disgusting. america is so dead.

 

 http://nakedempire.wordpress.com/

Fri, 02/04/2011 - 19:06 | Link to Comment Yen Cross
Yen Cross's picture

Feint of Heart.

Fri, 02/04/2011 - 19:13 | Link to Comment prophet
prophet's picture

Zero Hedge / Infinite Easing

Fri, 02/04/2011 - 19:24 | Link to Comment 10kby2k
10kby2k's picture

 

Your not playing against Bernanke necessarily.......everyone is on the inflation train, thus you are playing against the 'expectations of the reactions to Bernanke' of other traders.  Good luck!!!! 

Fri, 02/04/2011 - 19:32 | Link to Comment no life
no life's picture

  they issue 30's next thursday..

Fri, 02/04/2011 - 19:31 | Link to Comment BORT
BORT's picture

Bernanke gave the banks a steep curve for over 2 years to get their houses in order.  They failed to do it in reality, and the game will end soon in my opinion.  The Chinese will not roll over on this, and the US has fewer and fewer friends.  The rates will start going up, and the budget deficit will just keep getting more attention.  Let's see how the debate goes for the debt ceiling, I know it's going up, but let's see what has to be thrown out in terms of spending to get he deal.  If nothing, the American people (those who can read and understand language) ; or the bond vigilantes; will push the rates to a crisis point.  Can't happen. ?  Can't lose Egypt as an Ally?  Can you say 2 weeks

Fri, 02/04/2011 - 21:36 | Link to Comment topcallingtroll
topcallingtroll's picture

The only place more hated than the usa is china. They send their poisoned contaminated shit everywhere. The world is more against china than the usa.

Fri, 02/04/2011 - 23:57 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

God, how naieve.

Sat, 02/05/2011 - 00:54 | Link to Comment Bear
Bear's picture

You are seriously misguided. Wherever the Chinese go their community ends up owning everything around ... but however much they may dislike the individual Chinese, they love the cheaper products and love to sell their raw materials. 

Fri, 02/04/2011 - 19:48 | Link to Comment nonclaim
nonclaim's picture

Call me cynical, but somebody wants to divest from Brazilian investments... Two comments on the recommendations:

PBR accounting is a black box and it is managed by a political appointee of a socialist government that needs a lot of money to feed itself. Oil will go up, yes, and so will PBR's debt as they need to issue as much as $70 billion in bonds for pre-salt oil investments (on top of the huge 2nd public offering last year). You can make money but be aware of what you are getting into.

Utilities... the grid is under stress due to bad management (political appointees, again) and lack of long term investment, as the country grows and consume more the "greens" (mostly foreign ngos) fight any new instalation/source of energy. Black-outs are to become more common going forward and may hurt regional utilities. Choose wisely.

That said, if you want to invest (not just speculate) there are a lot of opportunities in smaller private companies and I think there 'll be a lot of M&A ahead of the World Cup and Olympics. Good luck.

Fri, 02/04/2011 - 19:52 | Link to Comment Cdad
Cdad's picture

Agreed on PBR.  There are several issues within this article that I find questionable.

Listen, if you actually know poker [or implied Hold'em], then you know you go all in only in two circumstances:  you have the absolute best hand, or your bluffing and can afford to loose your kitty.  If you watched Ben Bernanke yesterday [as his voice quivered] it was clear that he was bluffing.  He was jawboning...with nothing left behind him.

But don't believe me...just take the bond action as gospel [although as I posted elsewhere...that still needs to be confirmed].  Again, I think Ben Bernanke would scuttle the ship [of state] before he would go under...so... 

The equity market has over played its hand.  The bond market has said so.  Everyone can see the debt ceiling showdown coming, and NO ONE knows how that will play out...yet. And Ben B. has also...over played his hand...IMO. 

 

Fri, 02/04/2011 - 21:32 | Link to Comment topcallingtroll
topcallingtroll's picture

I used to sing ewz praises but fortunately got in and out this last time.at the same price. It may rise from here but brazil lost its luster when they helped themselves to.some free equity in pbr at the expense of everyone else.

Fri, 02/04/2011 - 19:52 | Link to Comment Zero Govt
Zero Govt's picture

Printing press on 'full' to pressure the Chinese into floating their currency. Makes perfect sense!

Don't worry your heads about what it does to the little people. Just play your egoist-geo-political games to see which bunch of Govt parasites blink first on policy

Fri, 02/04/2011 - 19:45 | Link to Comment Yen Cross
Yen Cross's picture

Jimmy Cramer is a bald Ware Wolf! Santelli told me so.

Sat, 02/05/2011 - 02:27 | Link to Comment StychoKiller
StychoKiller's picture

Got Silver (bullets)?

Fri, 02/04/2011 - 19:55 | Link to Comment Justaman
Justaman's picture

We know that the easiest way out of this disasterous monetary policy is to inflate the crap out of things.  Worthless interest payments to bondholders is what these cronies are looking for regardless of this strategies impact on the rest of the world that is pegged to the greenback. 

Fri, 02/04/2011 - 20:25 | Link to Comment Sigmund
Sigmund's picture

The gifted and highly educated are predisposed to insanity.  Their egotism tends to cut them off from a broader world view (reality) and locks them into a cognitive prison of their own making.  The stress of the unrelenting challenge to his convictions are catalyzing the Bernank's psychosis.  The growing quaver in his voice signals an internal battle where he is desperately trying to kill his own uncertainty.  If successful he will be well on his way to the insane asylum.  I have been slow at accepting the possibility of infinite QE because of its obvious irrationality, but the Bernank's growing loss of reality contact along with that of his side-kick Timmy suggests the odds are growing.  Placing bets based on the actions of madmen is perilous.      

Fri, 02/04/2011 - 21:04 | Link to Comment topcallingtroll
topcallingtroll's picture

He is getting nervous because he was given a pos car to drive and congress has tossed in thousands of pounds of deadweight and they are still expecting him to win the race. But the bastard might pull it off. The new success is going to look a lot like the old failure.

Fri, 02/04/2011 - 21:06 | Link to Comment Hollow_Point
Hollow_Point's picture

Well said Sigmund, but did you mean..

 

If successful he will be well on his way to the insane asylum.

 

 literally. If not could you elaborate?

Fri, 02/04/2011 - 20:27 | Link to Comment equity_momo
equity_momo's picture

qe2 has taken oil from 70 to 100.  qe 3 will push it to 150.    qe 4 , plus 200.

im waiting for the keynesian cheerleaders to explain how that is going to create or sustain a strong economy.  because it sure didnt get there through a strong or growing economy.

"Its all bullshit folks , and its bad for ya"

-G. Carlin

Fri, 02/04/2011 - 20:58 | Link to Comment topcallingtroll
topcallingtroll's picture

High costs of oil reduce demand and limits co2 output thus allowing the natural return of the mini ice age we are due to proceed. More snow equals more outdoor recreation equipment sales. Then we pyramid off this new growth dynamic and hit dow 36000 about two years later. Everyone in america retires as rentiers.

Fri, 02/04/2011 - 20:53 | Link to Comment topcallingtroll
topcallingtroll's picture

Let the price increases boomerang and the rebalancing proceed. Balls to the wall with China. We are going to need 25 dollar entry level hammers to put americans back to work as well as a deflation in the defense industry and healthcare to keep this rebalancing party going

Fri, 02/04/2011 - 20:59 | Link to Comment Silversinner
Silversinner's picture

They only destroy currency when masters of

puppets is covered.Masters where always into

gold but covered big time on the European central

bank sales and crazy leasing of CB gold.

Better believe they are prepared for this enormous

transfer of wealth,are you???

http://www.youtube.com/watch?v=WEL6_SuQCu8

enjoy the ride!!

Sat, 02/05/2011 - 05:33 | Link to Comment BigDuke6
BigDuke6's picture

Metallica link... i saw that tour -  '..and Justice for all.'

Fantastic .. and then they became money grabbing bastards who forgot about why they had started doing what they did in the first place.

A rock band of their times ... your comparison with boom and bust is poignant my friend.

 

Fri, 02/04/2011 - 21:58 | Link to Comment dark pools of soros
dark pools of soros's picture

2 7 is a great hand to hold when 3 or more players are holding... means more 2's and 7's are still in the deck.. usually worth calling for the flop

Sat, 02/05/2011 - 00:48 | Link to Comment Bear
Bear's picture

I'm looking forward to playing in your game

Sat, 02/05/2011 - 12:07 | Link to Comment quadcap
quadcap's picture

Implied odds, bitchez!!!

Sat, 02/05/2011 - 00:10 | Link to Comment htp
htp's picture

China has its own long term strategy. The yuan will stay essentially pegged to the dollar no matter what the Fed does in the near term.

http://www.hturning.com/index.php?action=home&page=3

Sat, 02/05/2011 - 05:05 | Link to Comment Grand Supercycle
Grand Supercycle's picture

As mentioned, key global indexes remain very overextended and as a result the correction may be sudden.

http://stockmarket618.wordpress.com

Sat, 02/05/2011 - 11:12 | Link to Comment Whalers
Whalers's picture

Bernanke Put??  So, you are saying that the clown in the Fed is in complete control?  That the Fed single handedly controls all stock markets including international ones and commodities?  I think everyone is giving them way too much credit. 

I submit to you that the market will fall like it always does (20% or more) and will prove that the Fed is just as useless as ever.

Sat, 02/05/2011 - 12:06 | Link to Comment quadcap
quadcap's picture

Inflation, deflation, blah blah blah.

The Fed is simply the public face of the largest counterfeiting scheme ever invented.

The populace is greedy, envious, fearful, lazy, and stupid, and are easily taken in by the ad men who front for the crooks.

Forget your "investments".  Start figuring out how you want to live, and then start living that way.  The truth is, we don't need their system.   We'd better not, because the sucker's going down...

 

Sat, 02/05/2011 - 13:15 | Link to Comment Highrev
Highrev's picture

That was tough.

Sun, 02/06/2011 - 09:14 | Link to Comment Sudden Debt
Sudden Debt's picture

THE REAL QUESTION IS: HOW BIG WILL QE4 BE!!

 

 

Sun, 02/06/2011 - 09:44 | Link to Comment tom
tom's picture

This guy's very right on all points, just need to watch out for pullbacks in all the commodities that have been directly affected by recent weather, and be ready to start scaling back bets on further QE whenever the oil price breaks upward.

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