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Guest Post: The Coming Rout
Submitted by Chris Martenson
The Coming Rout
There's a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%. The trigger will be the cessation of QE II and a multi-month pause before QE III.
This is a reversal in my thinking from the outright inflationary 'buy with both hands' bent that I have held for the past two years. Even though it's quite a speculative analysis at this early stage, it is a possibility that we must consider.
Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals. The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.
But over the next 3-6 months, I have a few specific concerns.
It's time to build on the idea I planted in the Insider article entitled Blame the Victim (February 28, 2011) where I speculated on the idea that the Fed might be forced to end its quantitative easing programs, almost certainly because of behind-the-scenes pressure.
Here's what I said:
How I read [the Fed's recent propaganda tour] is that the Fed is taking some heat for its inflationary policies, mainly behind closed doors, and it is trying to do what it can -- with words -- to soothe the situation. Perhaps China is making noises, or perhaps Brazil's finance minister is making the phone lines feeding the Eccles building smoke ominously, or perhaps it is internal pressure coming from politicians with restless voters. Or all three.
The big risk here is that the Fed will be forced by this rising pressure to discontinue the QE program in June at the normal ending of the QE II efforts. Couple that with a possible federal showdown over the debt ceiling right at the same time, and you have the makings for a massive fireworks display, possibly involving derivative mortars bursting in air.
At the time, I speculated that all of the Fed's pronouncements about inflation being almost nonexistent were actually signs that the Fed was taking some behind-the-scenes heat for the inflation its policies was creating. And I worried about what would happen if the Fed were to end the QE program in June.
Let's just say it won't be pretty.
Everything would tank. Stocks, bonds, and commodities. All of the risk assets that have been unnaturally supported by a flood of liquidity, too-low interest rates, and thin-air base money would give up those ill-gotten gains. Gold might behave a bit differently, because along with these market declines will come an enormous amount of uncertainty about the financial system itself, usually a condition for higher gold prices. So I expect gold to correct somewhat, but not nearly as much as everything else, and it could even gain.
The story is, admittedly, getting more confusing by the week, with some calling for hyperinflation and some calling for massive, outright deflation. I am trying to surf the probabilities and stay one step ahead of whatever curve balls are coming our way.
The basic idea is this: The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010. The markets, all of them, are higher than they would be without this money. $4 billion per trading day is an enormous amount of money. It's gigantic by historical standards. As soon as the QE program ends, the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.
Hello, downdraft.
The markets are quite substantially elevated due to the efforts of the Fed. T, and then some, is quite likely to be rapidly eliminated as soon as the QE program has ended.
It's really that simple.
To make the story even more difficult to follow, the Fed has been sending out teams of PR agents in an effort to guide the markets with their words.
First, on March 2, 2011 Bernanke said this:
Bernanke Signals No Rush to Tighten When Asset-Buying Ends
March 2, 2011
Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.
A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.
The "no rush to tighten credit" statement is a signal that the Fed will neither raise rates at the end of the QE program nor perform reverse POMOs where it reels cash back in and pushes MBS and/or Treasury paper back out.
Upon the cessation of the QE efforts, and the cessation of $4 billion a day in Treasury buying pressure, it's a safe bet that market interest rates will rise. Bernanke is at least on record as saying that if this happens, it won't be because the Fed has taken the lead.
Bernanke was being a little bit sloppy in his statements, because stopping QE will serve to tighten credit simply because there will be a lot less liquidity sloshing around the system. It's a situation where the absence of excess is the same as the presence of tightness, if that makes any sense.
Then on March 5th, a much stronger and clearer signal was given, confirming my worries:
Fed Policy Makers Signal Abrupt End to Bond Purchases in June
March 4, 2011
Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.
“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.
Whoa. This is important news. Not only a cessation of QE, but the possibility of a sudden stop is being telegraphed. This will change everything.
The old saying 'sell in May and go away' might never be truer than this year, although with this sort of a warning, the cautious investor may want to get a head start on things and sell in March or April.
For some time there have been rumors that the Fed has been splitting into factions, with some of the inner team becoming increasingly uncomfortable with the QE program and its effects. But so far they've either spoken in code to reveal their displeasure or quietly resigned. So we're pretty sure there's an admirable level of support within the Fed for ending QE, and it has now bubbled to the surface and reached the public arena.
Of course, there's some form of gobbledy-gook reasoning being floated to justify the plan for a sudden stop rather than a gentle wind-down, and it involves the distinction between 'stocks and flows' (from the same article as above):
Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.
“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”
Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”
The idea that Brian Sack, a 40-year-old economist with a PhD from MIT, is winning the day in the argument of "stocks over flows" is somewhat troubling to me. MIT is a quantitative shop, home to some very brilliant people, but how markets will actually respond is another specialty altogether, one that requires a bit of on-the-street experience. Markets have a bad habit of not being logical, not fitting neatly into tidy formulas, and ignoring things like 'stocks and flows.'
I'll go even further. I'll take the other side of that bet and opine that the flows are much more important than the stocks, because it is the flows that support the continued budget deficits of the US government — which, it should be noted, will still be with us each and every month long after June 2011. Those deficits are baked into the cake and will require in excess of $125 billion in new Treasury sales each and every month.
Who will buy all the Treasury bonds after the Fed steps aside? That is unclear. If there are not enough buyers at these artificially inflated prices, then the price will have to fall until sufficient buyers can be found. Falling bond prices are at the other side of the financial see-saw from rising bond yields; one goes down while the other goes up, and the Fed has been pressing firmly down on yields for a while via the QE II program. When that's over, pressure will be reduced and yields will rise.
So what to do? For those concerned enough about this possible scenario to consider taking action, please see Part II of this article (free executive summary; paid enrollment required to access). In it, I predict the extent to which stocks, commodities, Treasury bonds and precious metals prices may be impacted in the near term. I also detail the key indicators to look out for in order to determine if and when this scenario is unfolding - as well as recommended strategies to preserve capital during this corrective phase.
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Good point. If the world stock markets start crashing and are lead by the U.S. stockmarket / dollar what would be the flight to safety? Certainly not the Euro or the Dollar.
Come on, the safety play is still the USD. Like it or not, there is no other currency that could handle the volume and size of transactions in a crisis.
Consider your self un-junked. (Even though I was not the one to junk you in the first place. In your scenario, if the world stock markets crash, the UDS will be the dominant flight to safety. So will PMs, but who will be buy an ounce of gold at $3000+? You will not get much bang for your buck if you can only afford a small amount. The USD will will the tallest midget award. Or as they say, in the land of the blind the one-eyed man is king. It still won't be pretty...
Chris, the same thinking many are doing. Question is, do these fed people know what they are doing or not? We know the President has no clue and neither do the vast majority of congress. Do the Feds argue this issue, you bet they do? But the real question of course is what will they do? Answer to that one depends on if they either think they know or know they don't know and trends suggest more and more realize they don't know.
Look to the BIS reports and various European think tanks for clues, because both the Euro and Fed Dollar are in similar boots with one big difference. The EU is a group of separate nations with rather weak political and monetary binds whereas the US is a Union of mostly weak States with increasingly bigger Federal Government. States in Europe are getting stronger in relative terms like Germany but weaker in the PIIGS. Germany, France and other Northern Nations can either leave the others behind to fend for themselves or leave themselves but the States in the US can not easily do that. I doubt the Fed members think of talk about this to any at all which tells us one big important clue, they don't know what they are doing and will probably do like you say end QE2 and hope for the best. That is when the shit hits the fan in the US and all bets are off as to what will happen.
I agree with your immediate scenario, and would take it to emergency situations with things like martial law and even worse, handing the ball over to the President and Congress to fix their mess. 2012 is now up and running and with politics in the wing the Fed Reserve governors are thick in the middle of playing politics which is something bankers are abysmal at.
Conclusion, they will fumble the ball and destroy both the dollar and Union. We are likely to see very same situation in North Africa to Arabian sub continent right here in the Continental US.
Conclusion, they will fumble the ball and destroy both the dollar and Union. We are likely to see very same situation in North Africa to Arabian sub continent right here in the Continental US.
None to soon for me,at least WE would make our own decisions.
No way it could be more screwed than they have done it.
Sitting at the pivot point, could go either way.
But with the bank stocks strong today, momentum is on the side of the bulls right now.
Transports getting destroyed, market has topped!!
RobotTrader - Mon, Mar 7, 2011 - 11:08 AM
Bombs away!!!
Huge reversal day
Wow .... A monkey hammer.
Gee, Could this be why?
Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.
Bought mine in 2003, selling nothing until we approach 1:16 GSR.
Glaring omission of vital data. Namely, denial that a working, effective justice system is prerequisite to establishing validity of any economic system...and overwhelms any bright MIT-quantitative exercise.
The bright-MIT-quant exercise had to omit any considerations of fairness [justice system] because the latter does not exist...except in myth and propaganda...and the funds to sponser the exercise-in-futility are tainted by bankster interests.
Read an article recently about game theory. As you know game theory is heavily used for economic predictions, policy making etc.
But recent experiments prove real people do not behave as game theory predicts. There are 2 exceptions. The only people who behave as game theory predicts, are mathematics professors and psychopaths. Make of it what you will.
Simple. Its 'bagholder' time. Unless youre part of the PTB, whatever you own will be worth almost nothing as QE stops, and the debt is transfered to you. See the game all along has been about 3rd worlding america, and implementing a 1 world govt, 1 world currency. And the time is here now, endgame.
See the game all along has been about 3rd worlding america, and implementing a 1 world govt, 1 world currency. And the time is here now, endgame.
Point taken SD1.
THAT is the game. People shouldn't wonder what the "Fed" will do as much as what do the the people that OWN the Fed want it to accomplish. Hence SD1's point.
The Fed believe it or not is just a bit player at this point. What they and a few other KNOW is that we are producing 84ish million barrels a day now on this side of the decade. On the Other side of the Decade 2020+ish we will be producing about 5 - 10 million barrels less per day.
If SA drops production in the coming months ala Tunisia, Egypt, Libyia, then the world as we knew it will never be the same.
They are currently just trying to arrange long boats for the chosen and keep everyone else entertained on the fan tail.
HOLD IT!!!!
Stop the Presses!! all you crazy dooms day Zero Hedge freaks!!!
Dow Jones Industrial Average surges more than 100 points as banks lead rally
The "Ber-Nake" has fixed it... sell all your gold and silver... and just go home and relax... the world has been saved!
All Praise Goldman Sachs for doing all that Gods Work to save us dumb fucks!!!
It was a close one, but we are safe now... POMO is here. http://www.newyorkfed.org/markets/tot_operation_schedule.html
I feel better just saying it.. say it with me.. its all ok, there never was a problem.. our goobermint is on top of the problems.. we can just sit back and watch Jerry Springer / Danzig wiff da Starz and eat bon bons with our new food stamps. All is well! YAAAAAYYYYYYYYY!!!
Zero Hedge Freaks! I like it. It's true. My friends turn and run when they see me coming now. All my e-mails are marked spam. My parents God bless them think I'm an idiot and are waiting for that GM paper to give them a big return. It's OK, I have food, guns, ammo and they can come hang with me when the zombies roll in.
I am the first, First.. FIRST! to say that I hope I am wrong, that the World will right it self in some calm way in which the United States fairs well.. I really would like the World to get more in tune with the realities we face..
But...
When the Goobermint lies.. to keep the people calm... and white washes over all the problems for the sake of keeping the people calm.. the real problems just get kicked down the road.
We need to be self sufficiant energy wise, that is at the minimum..
We need to be self sufficiant with regard to our food supply, at the minimum..
We need to be able to take care of our own first, at the minimum..
But when the Bankers get $700 Billion in TARP... which "We the People" earned 8% interest on those monies to only have the *Wanker Bankers then get a zero (0) % FED Window to draw from.. to pay back those TARP Monies.. so that "We the People" get nothing but Inflation (and other problems) in return..
Trillions of dollars more go to Wall Street and the Bankers every Fucking day... and its the Unions Fault? I hate the 5 city workers who stand on the corner watching the one guy dig.. but its not thier fault and they are not the fucking problem.. they are abortion.. they are fodder, a distraction from the robbery that is going on.
I will say this you Freaky Zero Hedge person you, be prepared and help all that you can.. and if you and I are wrong and things work out.. GREAT!!! but if they dont, I tell people it will be like Christmas shopping on steriods... people trying to buy everything they can before the dollar turns into toilet paper.
How many ways can an outside force.. like China.. turn our currency into toilet paper? not that China would but the fact that they could becuase we are so fucked up.. makes me nervous.
I am not a Freak.. I am a chicken, a prepared chicken.. if shit get crazy so be it, but I wont watch all this shit go on and not be ready to take care of me and mine.
Sorry to go on and fucking on..
Be a boy scout, thats the best you can do for you and yours who dont want to see the reality they live in.
I'm not stupid enough to disagree with CM, but I think you can wait for the moment.
The Fed is not going to roil the equity markets unnecessarily - It's the closest thing to an achievement the Bernank has. So forget about another flash crash - it started a real outflow of money that lasted more than six months, and the Fed had to make up the difference to keep the Ponzi from crashing.
Watch the VIX. If it's starts creeping up toward 25, get ready for "interesting times."
Fed stopping QE = IMMEDIATE US DEFAULT.
if the Goobermint doesn’t raise the debt ceiling... OOPS!! Default.
if the FED does NOT! continue QE InfiniTimmy... OOPS!! Default.
if the Price of Oil gets out of control due to any number of Country’s (with more ballz than the US) says “Fuck the Bankers” IMAGINARY DEBT PRINTED OUT OF THIN AIR... OOPS!! Default.
if China stops buying US debt and goes public against the dollar... OOPS!! Default. *** (not really “The Ber-Nake” would just use his paper weight to keep the print button depressed) ***
Really, if you think about it... there are more ways we are fucked.. than not.
Got Ammo?
No QE3, then no stock market. Period.
Chinese have opened retail markets and are encouraging investment in gold and now silver to absorb exported US inflation. This rapidly expanding physical demand. It's not going to stop any time soon.
What everyone's missing is that the
bernank is "renting" the treasuries he's bought under QE2. Yeah they've been technically sold to him but the
QE2 sales proceeds of the original "owners" are then loaned to the TBTF SPVs and hedgies for 1-day market speculation loans (i kid you not) to beat what the "owners" would otherwise get on treasuries. These "loans" can be reeled back in at will and used to repurchase treasuries. When QE2 ends in June, all that spec money now in equities will be reeled back in as the "loans"
are withdrawn from the banksters by
the original sellers of the treasuries. The proceeds will then be used to repurchase the treasuries the bernank is currently "renting"
Beautiful scam, no?
Actually those "loans" used for equity
speculation are already being reeled
back in by the "smart money" original treasury owners because equities and
commodities are fully ramped and trees don't grow to the sky, dig? Gets harder to ramp the markets from here.
You can tell, can't you?
so no money was actually printed then?
Think about it. Printed then unprinted.
Wash. Rinse. Repeat.
The FED can't stop QE. It will try to find a way to continue QE while also calming the critics. A nigh impossible task, but as others have pointed out, without QE no stock market gains and without stock market gains then all the reflationary effects on pension fund balance sheets goes away. Along with wealth effects (which are illusory of course but hey the FED believes in wealth effects).
Here is my guess: the FED will say the economy is doing better, but that housing is doing very badly again. QE 3 will switch from Treasuries to mortgages therefore, and the FED can save (a little face) by claiming "they are just targeting housing now." We all know that FED flows creep out into the broader markets. But, the public doesn't get that. Hey, even house economists don't get that.
Watch for FED chatter on Housing in the next 8 weeks.
Good article from Chris--the risk warning is spot on. But Chris, the FED will find a way.
GGGG
Rout delayed
I see more havoc from the sudden flood of $125 billion a month of net issuance of Treasuries onto a market that has been sagging under one-tenth of that for the past four months. We had no POMOs from February to August of last year, it wasn't that traumatic. As long as there's someone to buy the Treasuries, the market can run for a while on the delayed inflationary effects of excess reserves accumulated during prior months of POMOs gradually being drawn down and converted into new currency and broad money. But I don't see who's going to buy them. China has been out of the market for four months and with all its import commodities up like this its trade surplus just ain't what it used to be.
There won't be a sudden flood of
Treasury issuance. You're barking up
the wrong tree.
I'm commenting on a premise that QE could stop this summer, and saying the greatest havoc would result from the huge amount of Treasuries issuance that the Fed has been buying suddenly hitting the weak Treasuries market.
If you mean to say that QE definitely won't stop, my position has been, definitely not until oil hits at least $125. We're heading that way fast.
See my posts a few posts before yours.
Thou makest no sense little piggy.
You talk of the Fed buying Treasuries from bankster "original owners", but those are not original owners, those are just traders who are buying from Treasury and selling to the Fed, because the Fed is not legally allowed to buy directly from Treasury, except when rolling over its maturing Treasuries.
Treasury's been a net issuer of just under $120b a month lately, Fed's been a net buyer of about $105b a month. You've probaly noticed that Tyler has fun tracking which exact issues the Fed buys just to prove the point that a lot of Treasury issues are flipped to the Fed within days. That's true and kinda sickly funny. But Treasuries of similar maturity are so fungible that it doesn't really matter a whit whether the Fed buys old or new issues, all of it adds up to monetization of current net Treasury issuance.
The remainder of net issuance, about $12b a month lately, is actually sold to the market. That's what the collective community of natural buyers must take, in addition to rolling over their collective current holdings. That's foreign central banks, various kinds of financials and funds both domestic and foreign, and some local governments and their pension funds.
If the Fed stops buying, $105b a month more net issuance hits that market. Those central banks and financials and funds and local governments must buy, net, that much more every month at some price or else the auctions fail and the federal government can't pay its bills. I said net issuance to the market jumps to $125b because the net issuance trend is upward due to the payroll tax cut and various kinds of federal cost inflation.
double post
Checking the probability (guess) weather:
So right and yet sooooo wrong Chris:
Right: End of QE = down draft for stocks and liquidity-reliant scams.
Wrong: Silver will suffer.
The coming stock selloff will do exactly as the smart money did, not go into treasuries but rather into Gold and Silver.
I give you a C+ for effort.
Agree, the only thing real anymore is commodities. Ending QE results in US default and should result in a run on metals.
I think China and Japan are playing chicken with the US debt they hold. End QE and they will quickly sell as they realize we will default. With more QE they might try to play the paper game a little longer.
An added note, another poor growing season will very likely end the game as well. Still don't understand why rice hasn't taken off.
Low protein value?
Very similar to my view, expressed in following simple February 6th charts. USA will have to tighten soon, leading to second recession in q4 2011-q1 2012 and all 2012-2013. Except, oil will not go down, but up, because of continuing supply disruptions due to widening political instability in all ( except Norway) oil exporter countries. The inflation will be not there, so other commodities may well take a pause. But NOT oil. Recession in the USA starting in q1 2012 will only make a small dip in oil prices ( down to 2012 April Brent 135-150 USD/bbl).
http://saposjoint.net/Forum/download/file.php?id=2608
http://saposjoint.net/Forum/download/file.php?id=2609
Just two charts, clear picture. If there is correlation between DJIA change and GDP growth, the coming USA recession in q1 2012 and beyond will be minus 2%-4% quarter on quarter annually.
Nice to see a ZH thread with well thought-out, intelligent posts sans the BS.
I know you are but what am I?
do you sit down to pee?
do you get cramps?
would you like me to start a Midol collection for you from the Fight Club Regulars?
dont come to fight club... and sing about how nice it is to see people holding hands and singing kumbya.. fighting makes the points sharper, it makes us all more prepared to deal with others when trying to educate the blind..
the 40 years of peace and talking.. my best guess is that political correctness is out in a big way coming to a city / town near you very fucking soon.
wake up!
What an F'n douche you are. I've been reading ZH for years and wanted to comment on the quality commentary on this thread and how it hasn't resulted yet in pointless, mindless comments that have nothing to do with geopolitical issues or market economics. But, it looks like you just changed that.
Also, I'm a shitload more awake than you'll ever be dickface. You better go walk upstairs from your Mom's basement because I think I just heard her say your Pizza Bagel Bites were ready.
What a douche you are....(rolling eyes)
.
I was thinking the same thing ZB
about your first post, that is
LOL
So QE2 is just another classic Fed pump-&-dump.
And QE3 will be just another classic Fed pump-&-dump.
Don't people EVER learn?
I got it. Stocks over flows = lifetime oxygen input, not breathing last five minutes.
TradeWithDave.com
They will make owning any precious metal illegal when the time comes.
Would they do that? Those meanies.
they will have to.
Not much is held by individuals--they won't get much. Will they make it illegal for Chinese, Indians, Europeans to own gold and silver too? I suppose they could get a pile by seizing GLDs tungsten . . .
One world currency? Gold outlawed? Have you been reading Secy. Geithner's blog again. I thought I told you no more internet until you read your Al Jazeera.
Try to bring some gold bars with you when flying to a foreign city from the US. Guess what will happen to you?
a) a hug and a hand job?
b) they dont care becuase gold and silver are not money in the US?
c) they take your gold and silver and call you stupid for trying it?
d) all of the above?
Nothing happened to me flying to Lima (Peru), twice, from the USA. First time I had to fill out the Customs Form (the gold value was over $10,000). Second time I split the load with my wife...
you Senior Bearing have the luck of the Irish with you!!! could not have happened to a nicer guy!!
debt ceiling
government shutdown
cease and desist
two week extension
The only thing better for commodities than QE is not doing QE. No QE means the Treasury market will go into a freefall.
Doesn't this whole scenario go along with Thomas Jefferson's statement:
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
QE II to nothing to QE III to QE IV etc. It's banks trying to take ownership of everything.
+100
The Founders understood economics and government at a level that would embarrass 99% of the clowns we call "experts" these days. Keeping freedom is the hard part, the American system works so well that affluence and complacency make it self-limiting. We need to teach our children about the evils of fiat currency, fractional reserve banking, and "pure" democracy so they can start to rebuild from what is left of the country and the Constitution.
i knows its off point but the 'union' meaning the union bosses gave in cause they're not stupid. Better to write a check and keep the stupidity going than give up CB. Wi, in my view, is more instructive on how corrupt and backward the entire game is....and like the Fed, that fragility is coming to light. No one wants the carpet lifted to see the shit under there, now the public is getting a glimpse and its pathetic.
there is reason to believe qe may end - fed says qe will end.
qe was suppossed to get the economy back on its feet. it helped reduced mortgage rates for a while but seemed to have reached a point of diminishing effect (or even adverse effect)
while qe was spewing credit our govenment was snorting it up. there will be pain - daddy's taking away the credit card. taxpayers will have to cough-up serious cash so our hard working government can give themselves at least cost of living type raises (inflation being so bad and all - maybe they should be paid in gold coin just in case)
they need to withdraw the program now and come-up with something new in time for elections. war is always a popular option - how does facilitator-in-chief sound?
there is reason to believe qe may end - fed says qe will end.
qe was suppossed to get the economy back on its feet. it helped reduced mortgage rates for a while but seemed to have reached a point of diminishing effect (or even adverse effect)
while qe was spewing credit our govenment was snorting it up. there will be pain - daddy's taking away the credit card. taxpayers will have to cough-up serious cash so our hard working government can give themselves at least cost of living type raises (inflation being so bad and all - maybe they should be paid in gold coin just in case)
they need to withdraw the program now and come-up with something new in time for elections. war is always a popular option - how does facilitator-in-chief sound?
He makes some very good points, but I don't know about his overall conclusion. What is fundamentally different between now and the cessation of QE1, aside frim the massive injection of liquidity? The Fed and central banks managed to bouy up the markets all last spring and fall without a significant retrace and I wonder why. We had uncertainty back then, we had bad politics, we had massive civil unrest in Europe, flash crashes, etc. Maybe we have more of those things, but our lapdog media soothed everyone back to sleep then why not again?
I think he's absolutely right about the flows being the real driving force of the economy in the end, but I would like to see more quantitative analysis of where the QE2 money actually, then we could draw some conclusions about where those dollars move to after QE2 ceases with last year's intra-QE time period as a possible model. I think that would make it more effective analysis of what's to come.
I told y'all where the QE2 sales proceeds went. They are on "loan" to
equities and commodities markets and I'm not using the terms "loan" loosely.
They can be reeled back in by
the "owners" of the money on 24 hours notice. It's pretty friggin clever. Ben will actually get to reduce
his balance sheet when QE2 ends as the
"owners" take their winnings and go back to treasuries from whence they came.
Oh, Mr. Pension Fund: If you loan me
your QE2 sales proceeds, I will leverage
them up and ramp CAT tomorrow (and
give you a 50-50 split) and give you the
stock position as collateral. Better deal
than your former stinky treasury yield, ain't
it? We will settle up in 24 hours and
go on to the next ramp if you rollover
your loan to me for another 24 hours.
who believes a whit what the fed says
all the quotes to back a view point ,
QE3 has already started , 9 trillion missing on fed balance sheet
thee guys lie through their teeth
at the rate they are spending in a week the treasury is out of spending ,
it is so amazing to me to watch the analysts and writers keep going to statements made by bernanke to back a point ,
Just remember any time his mouth moves . a lie is spread ,
without the Fed, there is no bid for USTs at this rate.
If the UST is allowed to find its natural equilibrium, the game is up on the USA as far as interest and solvency.
The precious FRN crowd doesn't understand that scarce FRNs will lose their function as currency due to scarcity, aka they will lose moneyness. Also, that they are backed by debt that is defaulting will not help.
Every nation that goes into default sees its currency collapse, not skyrocket. Deflation=default.
This is all you need to know. If the Fed steps out of its backstop liquidity provider role, things will unwind in a couple of hours. That is what Sep/Oct 08 showed us.
There's always a bid for USTs. The
system was designed that way. You guys don't
get MMT.
I think we all get the MMT argument and don't care. Trav7777 is dead on. Once the propping of Treasuries is taken away by letting QE lapse, demand for securities yielding 2% will collapse. Prices fall and yields skyrocket. This in turn makes it impossible for the US to service its debt payments very quickly due to the levels of federal spending. Assuming the Fed doesn't step in to directly monetize debt (not likely), default takes place rather quickly (unless a budget miracle takes place) and the currency collapses. People want to get out of dollar denominated assets, but where to turn? Eurozone is in the same predicament, South America is too risky for most institutional and retail investors, Russia is a story of one default after another. When China presents your most stable and best sovereign play, you're in trouble. This thought experiment has been undertaken by many already. Show me an asset or class that can absorb a lot of liquidity in a short period of time readily available to and trusted by westerners, and I'll start believing a short term commodities plunge this spring/summer. To me, commodities look like that safe asset class right now, both near and longer term.
If anyone has other ideas, I definitely would like to know. This is my interpretation, but I'm open for better ones.
accuracy +100
Exactly. Many have missed the lesson from the fall of 08...
$36+ again for silver. Physical shortage, one party massively short and underwater. Exploding demand. May the party continue!
There will be no USD inflation. Do not bet on it further. FED and USA government, states will be forced to stop easing in June, and thats it. However, defence and safety in more and more unstable world will be sold in USD. The only thing that will go up is oil due to supply disruptions over all oil producing countries and underinvestment, not to mention overoptimistic reserves.
So , recession in q1 2012 in the USA is imminent, hyperinflation is not, oil price drop is not even during next global recession.
Which raises the question, will the world in recession tolerate oil exporters getting richer while everyone else is in recession?
Which brings in MORE instability from conflicting over Oil.
It's all figured in!
Silver is the way and the light. Buy junk silver coins at your local antique mall. Do it today!
Ben Bernagbo is as pot committed as he's ever been. After the massive stock run-up courtesy of QE1 & 2, why in the world would he let up now and let it whither back to where it was? It goes against every Keynesian fiber of his being. He will keep the pedal to the metal as long as possible. This time he'll use high oil prices as the reason to keep QEing, next time it will be something else, but there will always be a convenient excuse to keep printing. Because he has no alternative.
This scenario is wholly plausable. Truly, it's merely a repeat of last May's flash crash. It will be quick and brutal, over in a matter two months. No Fed cosideration on rates even offered. Steam let off and the can is kicked down the road another 6-12 months.
I disagree. When / if the FED decides to cut off the crack pipe, the resulting liquidity dry-out will cause panic selling of equities. That crack cash won't decide to reside in the crack house of Treasuries, where the Bernank would like it. But rather, it will find itself seeking out the safety and security of reality. That reality is Gold and Silver. Those that think Oil is reality better have a supertanker sitting somewhere to put it in and be prepared for it's short container life.
The END of all game scenarios played with a dying world reserve currency is Gold and Silver.
We do not disagree on the intermediate-/long-term outcome. But the powers that be are surely scared sh*tless at the rumblings of global revolution. A nice little flash crash would take some steam out of the food and oil trades. Perhaps the catalyst is not a formal ending of QE? A black (gold) swan geo-political event would be perfect for a 2 month correction.
Also, a brief market scare would be very convenient for the marketing of QE3..
If there are any fireworks, it's just the halftime show, until queasing continues with QE3.
Also the debt ceiling will never actually inhibit any politician from spending.
More interesting will be how long the states will left hanging out to dry in midsummer, before QE4 commences to fill their budget craters.
Deleted
Smells, looks and tastes like nasdaq 1999. But, never underestimate the power of a parabola. It'll smoke out most every bear before it tops.
Nice call! I was thinking about selling my oil and gold stocks in May and buy back when the Fed launches QE3. It may be that I'll do that a little bit earlier.
Be careful out there...
http://www.youtube.com/watch?v=85m_j5QTExI
In my article ..... Dollar Rally Commences As The Seigniorage Of Quantitative Easing Fails ... I write that today the US Dollar started to rally as stocks surged in advance of a major sell off. A global stock, bond and currency rout is underway, which will result in a a global sovereign debt crisis, as well as a dollar liquidity crisis, ending in Götterdämmerung, that is an investment flameout.
The S&P, SPY, closed at 132.58, at the middle of a broadening top pattern, diamond triangle, consolidation pattern, that goes back to132.27 on February 9, 2011.
Seigniorage, that is moneyness, failed on February 22, 2011 as the value of distressed securities, like those held in Fidelity Mutual Fund FAGIX turned lower in value. It was at this time that quantitative easing failed and inflation destruction commenced turning world stocks, ACWI , lower.
Urban Dictionary defines inflation destruction as the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies.
A dollar liquidity crisis is coming from the exhaustion of quantitative easing.
Stocks, bonds, and commodities are all going to be falling lower as the monies that the US Federal Reserve are now pumping into the global economic system fail to stimulate and actually turn toxic.
The bond vigilantes have seized control of interest rates globally and a massive sell of bonds is underway.
This commenced when the US central bank announced that it is going to print money out of thin air and then actually did so, the bond vigilantes went to work, calling the interest rate on the 30 Year bond, $TYX, and the interest rate on the 10 Year US Government Note, $TNX, higher, resulting in a steeping 10 30 Yield Curve, $TNX:$TYX, and a flattening 30 10 Leverage Curve, $TYX:$TNX.
The US Federal Reserve’s monetization of debt has resulted in a tremendous loss of value in government bonds, as is seen in the chart of the Flattner ETF, FLAT together with EDV, and TLT …. FLAT, and EDV, and TLT. The Feds actions have resulted in debasing the US Dollar, $USD, which in turn gave an explosive seigniorage and birth to oil, USO, as a premier currency, along with gold, GLD, and silver, SLV.
Bonds, BND, have entered an Elliott Wave 3 Decline.
World Government bonds, BWX, and International Corporate Bonds, PICB, have entered an Elliott Wave 3 Decline as well. Today’s fall lower in world government bonds suggests that a sovereign debt crisis has commenced.
Commodities, DJP and US Commodities, USCI, turned lower as seigniorage, that is the value of the distressed securities at the Fed, approximated in value by the mutual fund FAGIX, together with the 30 Year US Government Bonds, EDV, adn the 10 Year US Government Notes, TLT.
The US Dollar rose today as dollar ill-liquidity and demand for dollars commenced.
Bloomberg reports: “The US dollar, $USD, (traded by the 200% ETF, UUP), may reverse declines that have seen the currency drop 3.5% this year after bets on its depreciation against its major counterparts climbed to the most on record, according to UBS AG. Bets on the dollar weakening, so-called net shorts, surged in the week ended March 1 to the highest since the CFTC began publishing the data in 2003. “Investors should prepare for possible unwinding of these negative bets against the dollar, which are extreme at the moment.”
The Russian Ruble, XRU, and the Swiss Franc, FXF, the Swedish Krona, FXS, and the Euro, FXE, were today’s loss leaders.
The Euro, FXE, traded lower at 138.42 today having risen from 119 in June with the announcement of the EFSF Authority. Might the EFSF Monetary Authority Rally be over? I say so!
Martin Sibileau of a A View From The Trenches, relates: “In summary, we think there is no buying opportunity here and we even fear that gold may soon no longer resist the deleveraging forces at play, if Greece’s default becomes imminent, once the EU Council meeting of March 24-25 ends without clear resolution on the future of the EFSF. Indeed, if the situation deteriorates, counterparty risk will increase exponentially and liquidity will be sought everywhere. Gold would also be a victim.”
“We have already dealt here with counterparty risk in sovereign default swaps. This is something regulators have not addressed at all and is in fact the weakest link. Will we see it escalate in 2011? We have no idea, but we must be prepared and therefore, we briefly elaborate on it below.”
“When a bank sells a credit default swap on a sovereign within the Euro zone, say Greece, it promises to pay, if default occurs, par on the protected notional under the contract. But that notional is denominated in US dollars. As you can imagine, even if that default is caused by a strong Euro, at default, there will be a rush to USD liquidity, as those financial institutions that sold protection on Greece’s sovereign risk need to buy US dollars to deliver on their promise to pay. Therefore, the strength in the Euro that we currently see can swiftly turn into weakness, because in the presence of jump-to-default risk (i.e. right before the actual default.”
“Could this actually happen? It all depends on what the EU Council decides on March 24-25. Until then, in our personal accounts, we want to hold cash and gold. No stocks or bonds. Not even energy stocks or gold mining stocks, for they end with the word “stocks” and that will be enough for margin clerks to sell them (the case was made yesterday, as both gold and oil managed to make intraday highs and yet, the respective energy and mining stock ETFs sold off).”
“Lastly, it will be very useful to understand that for this to happen, it is not even necessary that the ECB actually hikes rates. In fact, we think there is a chance they won’t. However, with last week’s threat, the technical damage has been done.”
“Now, at this point, it should be clear that this counterparty risk will violently transform into systemic risk. Funding in US dollars, within the Euro zone will be limited, pushing Libor higher and leaving the Fed without a choice. The Fed will need to extend currency swaps to the European Central Bank. Why? Because at the end of the day, the ECB will have de facto renounced its monetary authority. The funds that Trichet refused to print on March 3 would eventually be lent, in multiples, by the Fed to European (and non-European) banks. Will Congress allow this? Until this point, gold would be under a lot of pressure. But it would soon become clear that the Fed cannot bail out the entire world and gold would then reach unthinkable highs.”
In an inflation destruction, and in a debt deflation, that is a currency deflation world, wealth can only be preserved by investing in and taking possession of physical gold, GLD, and silver, SLV.
Simple questions:
1. If the Fed ends QE2, interest rates will spike. How will the Treasury/Fed pay for the debt if interest rates are higher?
2. The Chinese are not stupid. Quite the contrary. So why would they be buying more T-bonds, if they know QE will end and the value of their bonds will crater? Maybe they know that the Fed is cornered, and must implement QE3?
The idea that the Fed would cause a crash to justify QE3 sounds a little crazy to me. If as everyone says, the Fed/Treasury would never hurt their buddies on Wall St, why would they do this? Besides, a QE-halt induced crash would be the final nail in the coffin of the retail bond and equity investor. A huge percentage of the population is already supported by government programs. Why would they want to decimate the remaining retirement funds (i.e. pension funds) throwing even more Americans onto Food Stamps/Medicaid/etc. ?