Fed Losing Its Grip on Our Expectations

RickAckerman's picture


The institutional crazies, village idiots and knee-jerk opportunists who bought shares yesterday following a Fed announcement of yet more monetization seem not to have been paying attention, at least initially, to the nasty sell-off in T-Bonds.  Well before yesterday, any sentient being would have surmised that easing’s impact on the economy had reached the point of diminishing returns. With administered rates pegged at zero and mortgage loans near historical lows, how much more boost are we to expect from yet another gaseous effusion of bank-system credit?  Most of it is going unused anyway, other than by banks for the purpose of “buying” – you got it! –  Treasury paper.



Contemplating this stupid shell game probably gets a faux Keynesian like Krugman hard, but sage T-Bond traders evidently were having none of it. As a backdrop, the Fed has been buying $45 billion of T-bonds each month, but offsetting it by selling a like amount of short-term Treasurys.  With yesterday’s announcement, the central bank ditched the offset, clearing the way for an increase in the Fed’s portfolio of “assets” above the current level of $2.861 trillion.  This latest twist in the soon-to-expire, dumber-than-dumb Operation Twist got a big thumbs-down from the bond traders, who drove futures prices sharply lower. Stocks, for their part, relapsed after the obligatory, news-driven short-squeeze, demonstrating that although the Fed may be capable of managing inflation expectations, its ability do so is no longer to be reckoned in months or weeks, but in minutes.



Bullish on T-Bonds


Despite the long bond’s plunge, we remain bullish on it down to 2% — but not because of the Fed’s insatiable appetite for auction paper. As we saw yesterday, the promise of more easing has become a short-term negative for bonds. However, we expect the effect to be overshadowed, at least for the foreseeable future, by the deflationary force of an imploding U.S. economy, and by the flight of capital to “safety” from Europe and other redoubts of economic folly that are a step closer to economic Armageddon than the U.S. (mainly because their respective currencies, unlike the dollar, are not held as a global reserve).


From a technical standpoint, T-Bond futures will be signaling more weakness, at least for the near term, if they are unable to rally from yesterday’s low. It coincided very precisely with a Hidden Pivot target at 147^29 (see chart above), and although that number could have been bought speculatively, a breach by more than three or four ticks would augur a test of November lows at either 146^25, or if any lower, 146^08.


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ReactionToClosedMinds's picture

lot of good & funny comments here  ....... something has to give soon (within 2013).... either I'm (and others) are slowly going insane or the mass of financial jornolists (see Bloomberg especially) will reveal themselves to be either incredibly stupid or essentially bolshevik espousers. But then again, I've been wrong plenty of times in my life .....    

The 'as-usually-good' testeronepit blog posting about Germany's 'rabble-rousing' economist set me off.

we pretend to work and they pretend to pay us .... late soviet era mantra ... coming your way soon  


Diogenes's picture

"the mass of financial jornolists (see Bloomberg especially) will reveal themselves to be either incredibly stupid or essentially bolshevik espousers."

Suppose every "financial journalist" in America were offered a choice of 2 magical powers:

1) Complete understanding and knowledge of any story you cover

2) Your hair will always look perfect.

How many do you think would pick the hair?

f16hoser's picture

Just out of curiosity; what expectations are you referring to?




max2205's picture

Who's going to buy the marginal shirt, watch, kitchen item?

Quinvarius's picture

Stocks move on easy money and cheap credit.  The bears, having had their asses blasted in the last month, continue to insist otherwise.  You don't have to like this economy any more than you liked the economy in Zimbabwe.  Stocks are going higher.  Deflation doesn't exist in fiat debt based currency.  You get massive inflation or you get hyperinflation when debt goes bad. 

NoDebt's picture

Their plan is working perfectly.  Hit everyone's "overload" button so often their brainwaves just turn into an Alpha Pattern like in The Matrix.  Then they'll do whatever you want.

Remember, in the zombie apocalypse you're probably going to be a zombie, not a survivor.  So you won't really mind all that much.

Freddie's picture

Remember, in the zombie apocalypse you're probably going to be a zombie, not a survivor.  So you won't really mind all that much.

BS. Supression fire and claymores.

Quinvarius's picture

Exactly.  That is why I prep by storing human brains in easy to open/smash containers.

lasvegaspersona's picture

Do serious people really believe that the purpose of Treasury purchases by the Fed are for any purpose other than to fund the government?

I know everyone was pretending along with the Fed but now some seem actually surprised that the Fed continues to buy them even though it is now obvious that the originally stated purpose was just a smoke screen. Please don't tell me that I'm the only one to see this because my financial IQ just isn't that high.

mendigo's picture

it depends on your frame of reference
Ben would not describe it quite that way - he uses other words, he's very smart, graduated from mit.
Basically the us economy is collapsing in a slow and upwardly fasion.

philipat's picture

With the support of Wall St. of course to keep a cap on Gold. I bet they really think that is just hilarious.

forwardho's picture

Vegas, you are not alone. The big lie takes a suspension of reality to new heights. Then again, how many are willing to stare into the abyss?  If one opens their eyes, they must be prepared to accept our true situation. The rampant denial of facts will take more and more delusion.

Al Huxley's picture

You're not the only one.  There just seems to be a gentlemen's agreement in the media not to mention it, as outright monetization of $1 trillion/year might be interpreted as a bad thing, so everybody agrees to pretend they're doing it to 'stimulate the economy'.  I'm just amazed that more people don't call bullshit on it.

Clowns on Acid's picture

Al Hux - when the 2% call bs on it....gold will be bid past $2000. Then Gov't intervention in gold market, but to no avail as Pakistan, India, and China buy physical.....and then off we go to $5000. 

akak's picture

"Sure, my lifeboat is full of holes, but at least it gets me off the Titanic!"

(For the moment)

Freddie's picture

Hey Tyler(s) - here is a story for you.

Goldman Sachs bankers are buying guns and getting gun permits in NYC because they worry that the pubic does not like them.


Vendetta's picture

They don't have to keep their Gulfstreams' gassed up and ready to fly out of the country to Shanghai because they know the government won't do anything about their crimes.

The Alarmist's picture

Well, I guess we should be grateful that someone had a grasp on our expectations, if only for a brief while, as we certainly didn't