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Is Quantitative Easing About To End?
After having purchased over $243 billion in treasuries to date via a the QE bond buyback program announced in March, in some cases buying the bonds form primary dealers just days after an auction's completion, the Fed is now expected to wind down its $300 billion Treasury-buying program. As Bloomberg reported recently, "The FOMC “is unlikely to extend the life of these
programs, unless, of course, either the economy or the financial
markets take a significant turn for the worse,” Meyer, vice
chairman of St. Louis-based Macroeconomic Advisers LLC, wrote in
a report released yesterday. “We therefore expect the FOMC to
announce at its upcoming meeting that it will allow the Treasury
purchase program to expire in mid-September."
An article in MarketWatch highlights the major risks to near-term Treasury levels: "with the Fed no longer a constant, large buyer of Treasury notes and bonds, benchmark yields and mortgage rates will likely rise. But that threat isn't expected to prompt policymakers, some of whom have expressed increasing alarm over the prospects of higher inflation from the Fed's ultra-loose monetary policy, to extend the program."
Expectations that the Fed will allow the Treasury-buying program to die a natural death are part of a broader view that the central bank is moving towards a change in monetary policy.
"If the economy continues to improve, and signs indicate that it is, the Fed will believe that rising rates will be an acceptable cost," Barclays' Rajadhyaksha said.
If indeed the FOMC reveals next Wednesday a substnatial change to its ongoing monetary policy vis-a-vis treasuries, the volatility in bonds is likely set to materially increase, and the 4% yield threshold is likely to be promptly breached.
The other major question, of whether the Fed is actually truly convinced that the economy is improving based on data such as today's "optimistic" BLS report, whose interpretation could just as easily imply that the economy is still trudging along below expectations, is an open one, and for a direct answer look for a change in the tone as pertain to the Fed Fund rate... However, as PIMCO has often noted, do not expect that number to change for at least a year. And if anyone should know, PIMCO is it - of course, meaning that while the mainstream media and other agencies are thoroughly convinced the recession/depression is over, the Fed is nowhere as wide-eyed in its assessment.
And lastly, as disclosed yesterday, the Fed has purchased over $80 billion in agencies over the past month. Don't look for any monetary moderation in this particular bond buyback program: after all, the U.S. consumer needs to continue living in the bubble of artifically low mortgage rates for as long as possible.
In tangential news, Zero Hedge contributors have provided data that demonstrates that the Fed has monetized roughly 10% of the roughly $1.1 Trillion in debt offered in UST auctions in 2009 alone: of this amount, about $120 billion has been acquired via Open Market Operations, on occassions breaching 40-50% of the purchases allocated to given dealers by unique CUSIP. We well present the statistical evidence over ther weekend.
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It's Friday! Time for Goldman Sachs employees to kill puppies with claw hammers.
Uh-Huh, that won't last long.
They may have smelled the edge of the cliff and backed off. Will they actually stop for good, or is this jawboning to calm the herd before it stampedes. Who knows? The call of rising rates, spiraling defaults, and credit meltdowns will call them again.
It's all about the Treasury market now. I believe you are correct, they have smelled the edge of the cliff. Time will tell.
jim willie says that the chinese ordered obama
to replace bernanke next year
....hence i believe that
backing away from qe is more from compliance
to chinese instructions than a change of
heart on the part of the arrogant bernanke..
it's all being handled in a face saving way
but it puts to rest bernanke's hubris about
what a determined central bank can accomplish...
jawboning till the next decade...wait how soon is it the next decade?
There is no way they will do anything that causes rates to rise. They may say they stopped QE but they'll just be secretly monetizing some other way. It's not like they'll ever get audited, so they have no reason to do this publicly.
Agreed
Double agree... there are so many ways to monetize through the back door... just like a sieve.
It will be very interesting to see what the Fed will do come September.
On the surface of things, investors have been "green shooted" half to death. We've been indoctrinated by MSM and the administration that the economy is on the mend. A continuation of QE will clearly imply that the Fed doesn't beleive in the "green shoots" theory... but it may well prop the markets up (at the expense of $).
The Fed could find another way to effectively moentize Treasury debt-- but it won't fool the currency markets at all, and the dollar would continue to erode. This is clearly something the Chinese don't want... and don't expect them to play the auctions, either, when it becomes inside knowledge.
The article suggests that removing QE would increase interest rates. Perhaps that may well be the initial reaction, as Treasury rates have clearly been subsidized at the long end of the curve.
But I think an equity market sell-off would neutralize that effect, as a natural flight to quality would take place. My sense that the Fed and those in the administration have been needing both a equity market rally and low rate levels to meet 2 different objectives. Obviously for the bond market, subsidized low rates have help keep mortgage rates low and has helped keep the cost of new issuance (and interest costs) at bay. The equity rally has allowed many of those with bad balance sheets to either restructure debt-- or to "equitize", as many REITS have effectively done.
In the end, I think the Fed will take the QE training wheels off in September. If the economy doesn't lose traction and another TBTF doesn't unwind, they keep the little wheels off and look for other toxic stuff to buy in addition to MBS (which they will continue to do in boatloads). But it will keep the dollar supported and the Chinese investors happy.
The end of QE could mean troubled times for equities, but I'm not sure about that. I think that all depends on whether Goldman and the other prop desks decide it time to make money the "other way". From a policy standpoint, enginnering as correction may not be a terrible idea, though... the flight from equities would likely move investors to Tresuries, allowing an absorption of additional supply-- while protecting the dollar from falling further.
The window has been open now for about 6 months for companies to come to market for additional capital. Perhaps the "green shoots" we are being told to believe in can keep the window open for an additional month or two. I don't think we are close to an inflationary event anytime soon-- unless the green shoots spread into something more self sustaining. While I beleive that removing QE makes the most sense at this point-- I wouldn't be surprised at all to see policy seeking to keep QE and erode the value of the dollar even more.
Thank you for posting this!
assetman...well written, well reasoned. thank you.
in such a scenario, as politics count even more than fundamentals of late (in my view), the timing is critical due to the mid term elections, which the Obamas view as critical to the nth: if the Dems fare poorly in the mid terms, it will create in the minds of many a lame duck year 3 and 4 for Obama. In my view, all of the actions of the Obama political machine will be framed with a microscopic focus on the midterms.
If QE were to end and one buys the troubled time for equities result, it would have to be sooner than later as so many voters judge the economy and base their confidence on the ups/downs of the "stock market" as pounded by the MSM.
From the politics angle alone, it would be hard for me to believe that the Obama, Summers, Bernanke (okay, I'll include waterboy T3) complex would give up on the QE approach. If the Chinese bitch a bit, they'll be told to relax, we'll fix things after the election. Of course, the politicians won't fix the spiraling deficits and we'll go broke anyways, but that is another story.
TD,
The Fed program is for $300 billion and there as roughly $6.6 trillion in outstanding securities. I can't imagine that the culmination of such a piddly program will have any meaningful impact on rates. Why od you think it will? Psychology?
-- chunkylover42
also, can someone over there go ahead and activate my account?
The program is for Treasury securities only. The Fed has a separate program for MBS that runs in the $ trillions. So, they may not be able to monetize Treasury debt, but the Fed still has room to purchase mucho toxic assets-- just not all of them.
The removal of the program will certainly have an effect on rates in the short term, as the auctions are incremental in nature. And the Fed has been very successful for the most part getting their agents (primary dealers) to be aggressive and win at low bids... and with enough volume to get low average yields. It's been more difficult, though, as foreign central banks are pulling out.
Bad news for gold bugs. Bonds yields to go up and USD to rally against EUR because yield differential on the 2y will narrow.
Bond yields may go up if the Fed stops buying.... but that does not imply strength in the USD.
If there is any waning of foreign cental bank purchases while the Fed is not buying and risk assets are still getting a solid bid, I would look for a drop in the USD (although the EUR is in potentially bad shape as well).
Sadly, we will no longer have Brad Setser to analyze the TIC data for us, since he's just taken a government job.
With the FDIC in need shortly of its next debt funded infusion of capital (and Fannie and Freddie soon there after), I think selling gold is quite premature.
"but that does not imply strength in the USD."
USD up and AU down
Thsi due to the Euro and Yen.
I think we will see dollar support, especially now that the Brits chickened out and kept their own QE program in place. And the EUR? Might be in even worse shape that the USD.
I do think there will be renewed interest in Treasury debt with the removal of QE, but it won't likely be as intense as before-- and at a "price". I just think there is a lack of trust from foreign governments between what our policy people say (we support a strong $) and what they do (we will monetize the heel out of our debt and trash the $ anytime we $%^$ing want).
If all else fails, GS can trash equities and create a massive "flight to safety" trade. That will keep rates low -- and just it might just fill whatever requirements the Treasury needs-- including the expected FDIC/Freddie/Fannie infusion. Seling gold will be premature ONLY IF the QE program remains in place. There is too much debt to absorb, too little velocity of money, and way too much slack in productive capacity to worrry about massive inflation this year. The more immediate fear is a run on the dollar if policymakers keep the monetization strategy in place.
assetman....pls continue posting your views....very well written observations on your part.
thank you for your input.
>There is too much debt to absorb, too little velocity of money, and way too much slack in productive capacity to worry about massive inflation this year. The more immediate fear is a run on the dollar if policymakers keep the monetization strategy in place.<
Actually these are the perfect ingredients for a hyperinflationary storm, however short it may be. Considering the enormous pressures on people and businesses paper thin operating margins, traditional arguments for inflation are out the door. A quadrillion dollars in the notional value of credit derivative is inflationary and continues to wield it's destructive forces as we move forward. Just as a current example in the commodity sector, $3 gas highly inflationary against the falling income of individuals and revenue of businesses.
The Inflation Monster is alive and well and has many heads. If it wasn't, we wouldn't be discussing deflation and QE. QE is an attempt to maintain all the inflation created through decades of "bubbles" that were and still are necessary to perpetuate a fiat monetary system. Inflation is morphing and will continue to devour until the world financial system capitulates.
Since we have been doing an excellent job following the example of the Japanese property-bust-turned-deflation fiasco, I will predict that QE doesn't really end... it just guts shelved for a little while.
There seems (at least to me) little risk that the Fed announces an end to QE (since that might not play well in the bond and equity markets, and it then looks worse if QE needs to be restarted), so they either say nothing and let it die, or pull a UK inspired rabbit out and announce that they are extending the program, trashing the USD a bit more.
I tend to agree with you... except the Admin and Fed will parade the end of QE.
But it's likely QE will only get shelved for only awhile... until the next crisis occurs, perhaps Citigroup. It will initally not play well in the bond markets, but if the equity markets correct enough-- Tresuries will be snatched up like crazy.
The Chinese (and the other surplus nations who've bought T-notes) will be pissed if our current QE policy remains in place. Timmy has already made "assurances" to the Chinese in particular.
Not that it means anything.
This market is absurd... I wish there was someway I can afford to purchase the Zero-Intelligence T-shirt bc the shirt off my back has been stripped!
What and china wasn't buying all this time....nnnnnooooooo, say it aint so....
This is an excellent summary and thank you for providing this.
The Fed is buying their usual $12 billion (give or take) a week. Which is exactly what they said they would be buying back on March 18th. $300 billion over 6 months.
$300 billion over 26 weeks is $11.538 billion per week.
The last 10 Fed buys (Outright Coupon Purchase) happened over 32 days. Which is 4.57 weeks. Which would mean that the amount purchased at their stated rate of $11.538 billion/week should be $52.745 billion.
How much did the Fed buy?
$52.741 billion. 99.992% of what they said they would buy. Off by a lousy $4 million, which isn't even pocket change to the Fed. That's much closer than I usually expect from government work.
Here's the last 10 Fed buys :
Date / Amount in billions
08/06/09 7.000
08/05/09 7.248
07/30/09 6.496
07/29/09 2.999
07/23/09 3.000
07/21/09 7.000
07/16/09 1.499
07/14/09 7.500
07/09/09 2.999
07/06/09 7.000
http://www.newyorkfed.org/markets/pomo/display/index.cfm?showmore=1&oper...
I agree. Nothing sinister the Fed said they'd buy treasuries and they have.
They are funneling through the primary dealers, yes partly for political reasons, but mainly so the primary dealers can get their usual kickback cut.
Correct me if I'm wrong, but the Fed is buying treasury bills, thereby creating a situation where the Treasury owes the Fed money. The Fed is buying the treasuries, and looking to do what with them? Store them as a money reserve to negate the losses they are gonna take on all those toxic assets they bought?
yes - the fed is the recipient of substantial
interest payments on ust - interest paid by
taxpayers to a private banking cartel....
they are buying the bonds to 1. increase
money supply 2. monetize debt 3. and serve
as collateral or reserves for loans and
purchases of worthless assets.....
> interest paid by taxpayers to a private banking cartel....
Not sure that I would call the Fed a private banking cartel. They claim to be apart from the government only when handed FOIA requests...
If you are looking at their P&L, I think the Maiden Lane hits likely have losses larger than any interest payments that they are going to print for themselves.
legally and in practice the fed is a private
banking cartel - owned lock stock and barrel
by private individuals some of whom are not
usa entities....
it comes under federal oversight and the
president pretends to name a chairman but it
is completely privately owned and managed
....i am not sure
that it is required to comply with foia....
i would not bet much money on that statement -
maybe someone knows for a fact....there
is speculation that it would defy a supreme
court order to uphold an audit...
the fed on numerous occasions beginning in the
1920s openly and brazenly defied federal
legislation regarding its mandate - e.g.
open market operations which were legalized
ex post facto by a compliant congress in the early
1930s....
assuming around 2t usd in bonds and 2.5% average
interest - that would bring about 50-55b usd
per year.....however, i thought i read where
it owned 6t.....again, i would need to research
the exact number but given a balance sheet in
the neighborhood of 2t that is where i got my
numbers...
This is all posturing right now to bump the dollar up. As long our government continues to spend like drunken sailors, they'll need to continue to borrow, especially as tax revenues keep declining. Who's going to buy treasuries? No one except themselves.
Let the games CONTINUE!!!
Exactly...it's a shell game, that's all it is - a ruse, a confidence game played by diabolical socio-paths sitting in their palaces.
There is something I don't quite understand. The Fed essentially consists of some large private banks. In march, many of them were given TARPs. So are you saying that the private banks buy the Treasury notes with the money given by the Treasury? Do I understand this right?
The private banks are borrowing from the Fed at about 0% and buying treasuries and making the spread. If I could borrow at 0%, I too could make some good coin.
the federal reserve is entirely composed of
12 regional private banks but the most
important one
by far is the new york federal reserve bank....
the tarp funds went to other private banks
such as jpm, boa, morgan stanley, etc....
the fed creates money out of thin air to buy
bonds and normally purchases them from private
dealers - or at least it is supposed to do it
that way....however, last august, and perhaps
at other times it has criminally purchased
directly from the treasury.....
this is one reason why paulson wanted strong
language in the tarp funding to exceuse him
from all past, present, and future criminal
charges...
the reason for the blackmail was because
bernanke and paulson had broken the law by
initiating tarp before its legislative
authorization....and paulson had to save his
beloved goldman sachs....pauslon should be
in an orange jump suit.....
In this case, no. The banks are buying the treasuries, and getting a special rate because they are primary dealers of the treasuries. Next the Fed buys back the treasuries, probably with a little incentive, effectively double compensating the banks. The QE is done this way so that there is a good public auction that will add confidence to other buyers, as well as hiding the operation from the public.
Exactly (I repeat myself)...it's a shell game, that's all it is - a ruse, a confidence game played by diabolical socio-paths sitting in their palaces.
It's a recycle of the Golden Corral.
Time for direct purchases of stocks and corporate bonds rather than of treasuries..
Qu-easing? Never!
So if I understand correctly, what they're saying is that they're not going to do it any more, unless they decide to do it some more.
fedspeak
If you think QE is about to get squashed,
Killer trade for the rest of the year may be:
Short bonds
Short gold
Long dollar
I would go long the dollar and short gold, but shorting bonds when the market will crash due to its correlation with the dollar? Risky indeed my friend.
Add short equities and you may have it, without additional funding for pump.
Rising rates would kill real estate cap rates, cause high interest payments for equities, and reduce future growth in the models - if this market took account of the fundamentals.
Now, the real strategy is that the US & the UK work together and for hundreds of years countries have been fighting for resources. We have had a fantastic run of taking the world's resources and giving them paper in exchange. China woke up and realized the swindle, and has been buying up hard commodities including gold and trading in the paper. The Chinese also announced they wanted to buy US companies with their paper - the response may be national security increasing the value of the shares to avoid foreign purchases (that's probably why they said - "we hate you guys" - trapped).
The game is changing with Japan and China now requesting bonds in their own currency, possibly TIPS, and moving shorter in duration. Those countries are export focused and dependent on the US, we are all in a depression but we might have the advantage of lag time and see them crash first - USD would strengthen relative to those. China tried to get in the game and follow the US model by issuing bonds - nobody showed up, so much for their attempt at the paper shuffle.
Now that China has a manufacturing infrastructure, they can turn their focus inward on developing their consumers as the government is under major pressure from the people that have experienced an increasing standard of living - perhaps that will reduce their interest in colonizing - something had to give and their economic fall will decrease their need for raw materials - ding! I think China's market will drop first, and some of that capital will mostly likely move to a historically "safer" venue (USD). As bad as we think it is here (and it is) - other countries will be worse off.
Europe is stuck with Eastern Europe pulling them down, and they probably still have a lot of the US exported mortgage related paper on their books.
The mass media recovery reports are as much for overseas investors as for us little guys.
interesting theory
The China/BRIC collapse or decouple discussion is very interesting. I'm straddling the fence on this one - tough debate with good arguments on both sides and I certainly don't disgree with your assertions here.
I was thinking today....long calls + short puts on TBT = $
Yep.
Poor TD. See what happens when you use the terms of the police state? Ya get all fuddled up.
The question is:
is fascist corporatism ending?
That's a question that answers itself. Now look under the hood.
How did all these walking dead AIG/FNMs make billions last quarter? Did they all leverage up and buy the stock market (with fed money). Money from thin air/leveraged up to create more money out out of thin air. I don't know but that old quote from Henry Ford is ringing very true. If more people understood this monopoly game, there would be hell to pay.
one item would be the balance sheet asset treatment....it's certainly true for the banks
I think the explanation is something much simpler-- AIG made its boatload on much narrower CDS spreads. At least the taxpayer funnel to make GS whole had a difference source.
Treasury is going to issue $75B next week, ~$350B this quarter, and ~$450B next quarter. If quantitative easing does end, treasury will have problems. Ben is already taking a major chunk of the bond auctions. Why would anyone show up at the current expensive prices if he quits buying?
if he quits buying then buyers get yield....
by the looks of the tnx today
yield is headed higher - unless ben buys more
bonds....however it is all a bluff....in the
end the price of bonds will plummet...
there is not even enough monopoly money to
support the massive size of the bond market
at artificial highs indefinitely....
QE can stop, but the global equity markets will need to take a hit to start the "flight to quality" migration. Otherwise, the Treasury is stuck paying much higher yields on new debt.
The relevant question is how bad do we want to piss off China and the other creditor nations? If we really don't give a damn, the Fed can trash the dollar and montetize till the cows come home. I don't think that's a good move, though that have no bearing whatsoever on what might actually happen.
There's a 0% chance they don't continue with QE. Zero.
I can't see stopping QE cold turkey. The unexpected extension/increase of QE by BoE was a sort of trial balloon just like we saw with the initial announcement of QE.
And the important (and much larger) QE as ghostface and others have pointed out are the MBDS/agency purchases of >$1T.
If the Fed announced another purchase of $600B in MBS/agencies and $100 in treasuries would that be a meaningful reduction in QE? Not in my book.
to that point, there is NO exit strategy from the MBS buys.
one thing I have noticed from this admin is the "policy by trial ballon" behavior - leak something to the press, see response, alter as needed.
they leaked a bit about fannie/freddie the other day, good bank/bad bank, did not get a great response. the MBS market needs a fundamental change, just stripping those toxic twins of their assets will do no good.
until that fundamental change comes, the Fed has to continue to participate in the MBS market (or we could always live with 7% mortgage rates, just what the doctor ordered when 40% of mortgage holders are underwater).
If i were Bernanke I would be pissed that the admin has dragged their feet on the fannie/freddie front, it really ties his hands. i have said from the beginning, his interference in the MBS market will be his downfall. i still believe it, that is gonna be his Vietnam.
I agree... the MBS market needs a fundamental change, but BB's hands are tied and purchasing this crap is likely to continue. Well until the masses get restless, which will signal the beginning of the end for BB.
I second that motion.
Who needs QE to keep rates low when you have a crashing stock market?
Crash the stock market and wage a World War to divert attention away from increasing scrutiny of our country's representatives--how ingenious.
One can certainly imagine a few yin-yang cycles of:
QE -> rising stock market -> pause/slow QE -> drop market to drive fight to quality in treasuries -> resume/ramp QE -> rally in equities -> etc.
This could buy some time in the Fed debt markets.
But it doesn't work for MBS/agencies because they don't qualify for flight to quality anymore; hence why so much QE is targeted in that direction
That could well be the cycle, anon.
On the MBS/agencies front, the Fed is simply using it's expanded balance sheet to by crappy debt. This is also being monetized, though some might be sellable and have underlying value. Its being done because there's a lot more rMBS and cMBS to buy. Plus the debtors and the piggy bankers that took these foolish risks need to be paid.
You answered your last point, btw.
The problem is the yield curve. If stocks crash, the treasury interest will only be on the short end, and the long will still get smashed. Only QE can save the long end of the Titanic.
Just can't see QE ending. Just more targeted and opportunistic. And the lack of viable exit is concerning.
There is no end. In addition to the very good points made by others here, the greater macroeconomic problem of MPD that cannot be overcome until the whole system collapses and resets. There is no such thing as any system being able to internally create more energy from within itself to sustain its greater use of energy to continue to function at the same level - it decays instead. There are natural laws that man tried to supercede in the name of "new paradigm" economics and in other areas of life that cannot be overcome despite man's attempts to overcome them. We see the simple concept of the inverse square law amazingly revealed in the exponential creation of debt in the attempts to create enough GDP to overcome the debt -debt begets debt and the cycle gets worse. One trillion turned into two trillion in twenty years, turned into $8 trillion in eight years and will turn into $16 trillion in another four years. Not exactly inverse square or exponential, but that doesn't consider current unfunded debts that will be "paid in the future" by what(?) - more fiat money created out of thin air.
Appreciate the point, but there is an exit out called taxes and spending cuts: this is the endgame, and the line is sharp. See California and other states for a blueprint. The US can live within its means and it will survive. It will just be a house of pain for a while.
Currency swaps, shill bidders and every other conceivable fraud will be employed to launder QE in the US, UK and our insolvent ilk.
Is Marla gonna do the statistical study? Can't wait.
The FED is a Box. The same box it has been in for quite sometime.The FED needs low borrowing rates. It will let the dollar go and continue QE.That is my wager.
It's a very risky wager, IMO. Abandon the dollar and you abandon all the foreign central banks with surplus capital that could fund our debt. The Chinese are already preparing for the worst if we continue the policy, and they will sell even more $$ if Timmy doesn't come through on his promises.
Letting the dollar go increases the odds that the Chinese will do something dramatic-- and not in a good way for Uncle Sam.
Being a massive debtor nation really sucks. Good thing we still have a military. And nukes.
Assetman, you have a finger on the pulse. What will the Fed really do? - Part of this is an expression of a brewing division in the Fed itself with inflation hawks becoming more outspoken. Bernanke would like to keep his job, but there are many (Janet Yellin? Charles Plosser?) who would like to take it. Usually in Washington, the issues do not revolve around policy but personal rivalries.
There has been much discussion over the past few months about rates and 'unwinding' and this points to ascendance of the hawks in the FOMC. I suspect this is part of a drive to remove Bernanke then push Obama into replacing him with another Goldman alumni (Bill Dudley) as the new Fed boss. What would the Fed be like if Prosser was nominated?
Bwah- ha- ha haha!
Could do worse than John Taylor, who would be a good Fed Chairman. Bernanke has enemies he will face increasing difficulties. Precipitating a crisis for personal gain is nothing I would put past Bernanke. This is what I see as the issue, the current economic calm may not survive to the end of Bernanke's term even with him doing nothing.
The Chinese are in a dilemma; they would like to see an end of QE but the only way for them to guarantee it is for them to buy more Treasuries, particularly @ the long end. I wouldn't be surprised if the Fed and the PBOC made a deal for them (PBOC) to become a long Treasury straw purchaser, if such a deal hasn't been made already.
I don't think the Fed is recapitalizing the GSE's. I bet they implode all by themselves and make this discussion academic. Fannie just lost $14b and was begging for $11b more.
Rates are a problem but the last 'crisis episode' didn't feature a screaming ramped up yield curve, so that might not be such a problem next time around. Bernanke probably feels he can keep yields low by kicking a zombie (Fannie?) off the edge of a cliff and gain the safety trade. To Bernanke's mind this would cover his back.
The only dollar trade that matters in my (weird?) opinion is dollar for oil. Dollar for Euro, dollar for yen, what are any of these currencies really worth? Any decline in the dollar is a large risk in a spike in energy prices sends Americans back to Jimmy Carter and sweaters (uh, freezing in the dark).
I doubt the Chinese will do something drastic since they need dollars and dollar debt as much now as at any time. The Chinese have piles of iron and zinc and Treasuries. What will the Federal Reserve buy? (The correct answer is not the zinc.)
Nobody else will buy the zinc either so the Chinese need to 'play the game' to maintain their own illusion of growth.
Question:
I agree there wasn't a huge ramp on the long end in November, but do you think that the sheer volume of treasury issues auctioned this year will force everyone to the short end this time?
I've just assumed it would. I do appreciate the great comments in this forum.
"Good thing we still have a military. And nukes."
absurd!
are you by any chance a failed texas oilman recently retired from politics making a last-ditch effort to be taken seriously?
the US economy backs the US military, which is funded by debt, is denominated in U$D, and is currently stretched alarmingly thin.
and nukes won't get the global economy out of a global credit bust, though it would end it all i guess and make any recovery a neat function of the half-life of plutonium.
it's pretty twisted logic to think that treasuries, being overabundant and underbid and therefore in need of fed support, would suddenly rally when the fed withdraws said much-needed support.
there isn't enough surplus capital to fund our debt- this years' deficit is about equal to the global savings rate. and china is already buying less and likely selling, strategic stockpiling and their own domestic needs apparently more prudent.
heretofore it's been confidence in the US economy that gave our fiat credibility- the fact that the US can and will pay its debts via tax revenue. well, guess what- QE might be smoke and mirrors but it's still default.
and our debts now exceed even pipe-dream tax revenue scenarios. plus, if stopping QE will crash the mkt and, irony of ironies, drive everyone into bonds then a crashing dow (widely perceived to be the 'economy') means the economy is weak, decreasing tax revenues, and therefore the dollar looks weak, making treasuries look like a suckers bet, ad infinitum.
treasuries exploded last fall because it was an avalanche of deleveraging- massive and instant. fed actions have brought subsequent deleveraging to a manageable rate thus far so, barring another instantaneous and massive event, treasuries are just one of many flight-to-safety options which is, unfortunately, denominated in a currency which has devalued more than the interest paid. last fall was utter panic, but in the time since everyone's had the opportunity to gather their wits, witness another dollar slide, and notice that there are funding requirements much closer to home.
if stopping QE were to have the perverse effect of supporting gilts BOE would have done so. maybe the fed quits cold turkey in sept, maybe not. but there's mountains of future debt that there will be no market for so they'll be no choice but to buy it, thus QE will be with us in one form or another until the cows come home.
with continued QE the mkts get juiced, housing might even stabilise, and old debts get cheaper to pay off. the dollar's been floating on illusion for quite a while and those silly foreigners take a while to catch on so this is the most effective charade, and it has the added benefit of being incredibly short-sighted which makes it all the more appealing to polititians. therefore devaluation, hopefully creeping and controlled, is the clearest way out- ugly as it may be.
there are many advantages to going with this option, 3 of which are:
*all fiats currencies are being debased, so hopefully their relative values will stay within recent ranges, making cost of living rise but not disrupting the status quo too much;
*currency mkts can be managed collectively and usually (albiet temporarily) effectively;
*and best of all, if if push comes to shove a bank holiday and/or a revaluation of gold would be an instant fix and likely as effective as it was during the great depression and more recently argentina.
this is the endgame. but first, the fed (in its infinite wisdom) apparently wants another bubble- treasuries.
"are you by any chance a failed texas oilman recently retired from politics making a last-ditch effort to be taken seriously?"
-- yes I am. You outed me.
"with continued QE the mkts get juiced, housing might even stabilise, and old debts get cheaper to pay off. the dollar's been floating on illusion for quite a while and those silly foreigners take a while to catch on so this is the most effective charade, and it has the added benefit of being incredibly short-sighted which makes it all the more appealing to polititians. therefore devaluation, hopefully creeping and controlled, is the clearest way out- ugly as it may be."
-- The real end game for the Fed/Treasury is to zap as much capital from as many sources as it can to finance the mountain of debt it still needs to issue.
For now, its pretty much tapped Foreign central banks for as much as they are willing to donate. As long as the dollar erodes, tapping into that capital becomes less and less a possibility.
What the Fed can engineer, though, is another flight to quality move. There is still plenty of available capital in the U.S. that can move from risker assets to Tresuries. The past 6 months has seen a migration away from the latter and into the former.
People just don't seem to realize how low the long end actually got in October/November last year, when the S&P breached the 700 level-- and there was no QE in place. It wouldn't take too much to engineer this again-- removing QE would be a first step. Trashing equities would be next.
My sense is that we will cycle out of QE and back into QE, though-- until investors globally figure it out.
The end game may well be QE and trashing the dollar-- but more immediate need is finding available outside capital to issue Treasuries at as low a rate as possible. I just don't think we are done tapping those outside sources of capital-- and your 401K is next.
but more immediate need is finding available outside capital to issue Treasuries at as low a rate as possible.
absolutely on target.....one must think like a politician in this market and this is what the obamas are thinking. it's what they need; desperately need.
thanks again assetman....well rounded arguments on your part and communicated excellently I should add.
The US still controls the shipping sea lanes that China needs to import their raw materials and export their manufactured goods. The cost of this privileged use of the seaports for China is tribute in the form of buying USD. Until China can use its own Military to control it commerce routes, it will be beholden to the western world.
since they began QE the 10Y is up 100bps and the curve is steeper - probably discounting the inflationary pressures from the program - if they cease QE the long end should rally and curve should flatten - the Fed can't control the long end of the curve and rates are not lower than they would otherwise be, they are higher
bonds are a buy if the quit monetizing, imo
Much of the agency paper the Fed has purchased is from the GSE's themselves. In other words it's pouring the money into a black hole. Some might come back out but it just doesn't have the punch the buying from the real market does.
There is no particular evidence that the Treasury paper purchases have had any effect on the economy. All it has done is help liquify the financial markets. As of today even Ben knows the last thing we need is a speculative bubble in stocks. Let's not forget that the March rally started when insiders and close observers knew QE was coming. If they were to announce QEII now the stock market would probably look like 1999.
This is too easy. Quantitative easing will continue unabated. How do I know:
----
"The FOMC “is unlikely to extend the life of these programs, unless, of course, either the economy or the financial markets take a significant turn for the worse,”
---
I wish all investing was this easy.
Me not logging in. Mine all mine.
And in other news, today the US Treasury Department announced that it was ending the assignment of CUSIP numbers to individual Treasuries.
#29994
LMAO. That or the CUSIP is changed when the Fed purchases them.
qYUANtitative easing is coming.. that'll soon be the only way they'll finance any debt
The supply of govt debt vastly exceeds the demand at these interest rates, the stock market is overpriced, and the dollar is (re)commencing its death plunge.
I think the object is to finance the massive govt debt with low interest rates without imploding the dollar. At least for the time being. With that in mind, the only way you can honestly end QE to support the dollar is if you know there will be a demand to replace the artificial demand. You're not going to get that from foreigners under normal circumstances, who are wise to the game, so the demand must come from Americans. But Americans are intoxicated by equities, amazed that the depression ended so quickly and so easily, as they've been told by the cute cheerleader on MSNBC . . .
Do you see what's coming?
Of course, they could just let interest rates go wild and the dollar to plunge. I don't think it's at that part of the script yet. I remember seeing one draft where the pig flu paralyzes the recovering economy and the blame for all the misery gets shifted to pigs generally rather than Manhattan pigs particularly. Not sure if that's in the final draft.
there certainly is more ink being devoted again to the swine flu....it would be a convenient excuse, certainly.
Good Morning Children:
The following linked essay by Richard A. Eckert, CFA, found over at FSU, is in-line with my contention that the liquidity-insolvency issue is front and center and has not subsided on bit. I too believe that our current time is reminiscent of 2007-2008. How soon we have forgotten what got us here. How badly will the backside of the next liquidity-insolvency crises look? We should wonder. No matter the timing, illiquidity-insolvency is still prevalent and waiting explode once again. Nothing we've done has made it go away; we've just masked the problem with FAS157 and other similar slight of hand.
I find Eckert's little aside in the middle of the essay remarkable:
"And if rational expectations prevailed, wouldn’t the market value of all securities reflect all that is known and knowable about those securities? If markets were efficient, wouldn’t those securities be perfectly priced at all times? How, then, does one explain the arbitrage that keeps 100s of thousands, if not millions of traders, bankers, salesmen, portfolio managers, analysts, brokers, etc. employed at above average wages the world over? In a rational world, they’d all be order-taking clerks and there certainly would be fewer of them. I am always bemused by those who, at the same time, both embrace the “efficient markets hypothesis” and make obscene amounts of money exploiting the inefficiencies in the markets."
The pain will continue and it will grow. We ARE in a depression, this is not a recession and we are not coming out of this soon.
Read Eckert here:
http://www.financialsense.com/fsu/editorials/2009/0807.html
If you take a look at TBT (ultra short treasurie) it is screaming buy, signal big time. just crossed over 50 day volume weighted average (2nd time) with the macd historgram looking good, and a couple of other indicators. I'd be intersted in what anyone else has to say about this. or it is going up before another rigged treasury auction next week!!
August 27 is election time in Japan and it is very likely the new party will not buy our treasuries. Ben is stopping because nobody will be buying.
Very good points, anon.
Thanks for the post. Funny, my gut told me to pull all my IRA out of bonds on Friday. Let's see if the old gut indicator was correct?!
there's something missing here: the fed does not plan to stop paying interest on money held at the fed. They can stop buying treasuries outright from dealers, but they can always allow treasuries to be held in reserve at the fed. If the fed wants to prop the treasury market, they could just pay points above the treasury rates. Buying treasury notes is not the primary way the fed plans to control inflation. This is still a significant development. Just another point in a string of events.
The fed could also put the us back on a gold exchange standard, but pick a point significantly lower than what it should be, but high enough to cause inflation. Say $3000/oz.