met on November 3, the same day at the Fed’s QE announcement. I’m not
sure who the “presenting member” is who made the following comments.
They are all fat cat bankers and big hedge fund types. Here’s the list:
I thought the minutes of the meeting had some interesting thoughts on
the Fed’s move. The most significant observation is that QE just
shortens the average life of the public debt:
The
member noted that from an economic perspective, the Fed's purchase of
longer-dated coupons via increasing reserves was economically equivalent to Treasury reducing longer-dated coupons and issuing more bills.
Okay, let’s put this issue to bed. Whatever benefits (if any) QE may
bring us could have been accomplished without the Fed. Treasury could
have just changed the mix of its debt issuance and substantially
eliminated sales of 10+ year coupons for a year or so. Changing the mix
would have had the impact of starving the long end of supply and
therefore have kept long-term rates low. The problem:
The Fed and the Treasury are independent institutions, with two different mandates that might sometimes appear to be in conflict.
Yeah, Fed and Treasury are different. But this is a case where we need
to elevate the debate to a level above both of those organizations. This
is not going to end up being bad for the Fed or bad for Treasury.
It is going to end badly for the country as a whole and for all its
citizens. So there is no conflict between Treasury and the Fed. The
conflict is with the Fed and the people.
I was struck by this comment:
Members noted that the Fed was essentially a "large investor" in Treasuries.
The Fed is an investor? That’s a funny use of the word. The Fed
electronically creates money and then uses it to buy bonds. But this is
equivalent to buying something with 100% leverage. When you buy
something with 100% debt you don’t really own it and you are not an
investor. You are just a short-term player. The conclusion:
The Fed's behavior was probably transitory.
I doubt there is anything “transitory” about the Fed’s move. What they
are doing will end up being a permanent increase in their holdings.
There will be nothing transitory about it. But the advisory committee
sees it different and thinks they should not alter their debt issuance
as a result of Fed POMO:
Treasury should not modify its regular and predictable issuance paradigm to accommodate a single large investor.
A “Big Investor” sounds like a good thing. But really it is a
pain in the ass. The big players have a seat at the table and often
dictate policy. Ask Carl Icahn. Or better yet, ask the Chinese. They
were big investors in Agency Bonds. So big, they forced Treasury to
functionally guaranty $6T of paper. The Fed being a big investor is a
significant disadvantage to the country as a whole. That will especially
be true when the bonds come due and they have their hands out and
saying “Sorry Charlie, no roll over”. Don’t expect the Fed
to be benevolent when inflation comes roaring back. When the Fed is
forced to tighten, it is Treasury (AKA the taxpayer) who will pay the
biggest price.
The
presenting member thought that over the medium term (one to two years),
QE2 would force Treasury yields lower and would likely lead the curve to
flatten in the five- to ten-year sector. Meanwhile, the risk
premium in 30-year bonds would likely increase given concerns about
inflation and the value of the U.S. dollar.
The risk premium on the 30-year has been widening ever since QE was
announced. As the program unfolds there will be more weakness. The
30-year is, and will be, the ultimate measure of the success of QE, not
the S&P. I think it is headed into the crapper.
The presenter further noted that rate volatility will decline as market rates approach zero, with realized volatility in the long-end remaining higher as uncertainty and re-inflation fears increase.
Traders only trade things that are volatile. If they don’t move you
can’t make money. So future market angst will be taken out on the
long-bond. A consequence of QE is going to be some wild price action in
the long end. Good for traders, bad for confidence. Speaking of
confidence how about this warning of things to come.
The member noted that there was the potential for an extreme market reaction associated with the Fed's exit from potential purchases.
Extreme market reaction? It will be a blowout that will take 30% off the
equity indexes in a short period of time. Rates will back-up so quick
the economy will tank. It’s likely that when this happens we will suck
down a good portion of the rest of the world too. The foreign CB’s
already hate QE-2. Wait till Bernanke tries to reverse direction. There
will be a hell of a howl.
Thanks for the Input. They may not like it, but I do. Good scumbag list.
“Sorry Charlie, no roll over”.
The US is so dependent on the FED, that when they refuse to subsidise interest rates, they will own the place.
Bonds, equities, govt. spending will all crash.
OK...let's get real for a moment.
The richest man in the world (he who spends my yet to be collected tax dollars) can't afford a set of "good teeth"?
I mean...really?
How much do you need Ben...let me help you out...oops wait...you wiped me out...Fuck You!
I think you just identified how the Fed isnt crazy and stupid, but is instead movitvated by evil maleovence.