This page has been archived and commenting is disabled.
Why the Fed Cannot "Exit" Successfully... Without a Market Crash
Bernanke claims the Fed can successfully exit its current strategy. He’s lying. Or he’s adhering too strongly to economics and ignoring human nature.
One of the easiest trades for financial institutions over the last four years has been to simply front-run the Fed during its QE programs.
After all, the Fed was literally broadcasting its intentions to the markets. So traders did what they do best and took advantage of this.
In this context, the second rumors begin that the Fed would taper its bond buying you should see bonds collapse as traders realize the game is up.
And if the Fed actually did taper or begin to implement a strategy that even resembled taking its foot off the gas… or God forbid exit, then we’d see a very rapid adjustment to reveal the “real” risk in the system and the “real” level at which rates should be.
Take a look at what happened to the 10-Year Treasury when rumors of “tapering” appeared:
The Fed cannot exit. It will claim that it can, but market reactions to any real exit will be disastrous. We’ve passed the point of no return. Bernanke’s best home is to retire before the music stops.
For more marketing insights, visit us at:
Best Regards
Graham Summers
- advertisements -
Yes, the enabling Parent needs the child to fail so they can rescue them and maintain the dysfunctional dependency relationship.
In money terms, the enabling parent has a new plan to introduce to the child, so the child can be rescued and the "dysfunctional dependency relationship" can start anew.
There'll be no exit from QE in my lifetime.
I take it you are 95.
The glass is overflowing and they are still trying to pour more in????? Stopping before unemployment reaches 6.5 would admit failure. Continuing will eventually ruin the other 93.5%. Can Bernanke admit mistakes and adjust? We will see.
Potluck: They're bringing the bankruptcy and I'm bringing the guillotine.
there is absolutely no scenario where the fed with its 3.5t balance sheet could ever possibly contemplate "exiting." bernanke is a liar straight from hell, a minion of satan's little helpers of voodoo witch doctors....who plays coy games about "exiting" when it is an utter impossibility. bernanke is even more shameful than greedscam if that were possible.
Yes they can and they will. You will not like what happens to your investments but," quite frankly Scarlet they don't Give a Dam" It's all part of the plan.
The majority of citizen owns few stocks and has little investment worth bragging about. Those that read this blog are in the 1-5% of the population and most of you will be the ones getting the monkey hammering.
When the french took care of business it was anyone that the peasants thought was rich that got their heads chopped off. That would be me and you bud.
The tapering off will cause starvation amongst the poor and riots and ultimately the death of the upper middle class. Let the peasants get rid of the problem types.
After that the FEMA camps will round up the instigators and they will be put to sleep and the country will be in the hands of those with the guns.
If you wanted a Muslim takeover of a Country this would sound like a good plan, wouldn't it?
"Yes they can and they will"
No, they can't. They don't care anything about anybody's stocks. You don't seem to grasp the difference between "exit" and "taper".
The reason they can't exit is really, really simple. First, let's define "exit" as applied here. It doesn't mean "taper QE somewhat". It doesn't mean "cancel QE altogether". Exit means "We at the Fed will unwind the $2.5 TRILLION portfolio we acquired from the various primary dealers since the Lehman failure and the collapse of the financial system in 2008. We will end the ongoing QE programs and force the banks to buy back everything we purchased from them or loaned them credit against over the past five years."
To exit would require the primary dealers---not just U.S. banks, but all the foreign primary dealers (and there are more foreign bank PD's than U.S. bank PD's)--to repurchase from the Fed all the toxic crap AND Treasury securities that the Fed took off their hands under all the various (and ongoing) liquidity programs. Not only do they not have the funds to do that, it would completely erase their tier capital if they did--since their capital is just Fed credit supplied against the banks' junk paper.
To exit, the Fed would be destroying the network of banks that constitute the primary market for Treasury debt. They would also, by forcing $2 trillion in repos, be withdrawing approximately $20 trillion in reserve liquidity from the U.S. financial system. There is no exit possible from this fiasco. Everyone must get it through their heads: The financial system did not "almost fail" in 2008. IT FAILED. Enormous shadow-banking wealth evaporated as the market for collateralized debt derivatives simply dried up. As Merrill's John Thain predicted, it NEVER came back. There is no market for bonds built out of non-performing mortgages. There is no market for CDO's compiled from defaulted auto loans, student debt and delinquent credit card accounts.
The Fed bought some of this, loaned against some, and the rest remains hidden off bank balance sheets in special purpose vehicles that have no marks or are marked to fantasy valuations. But its value is gone, and if the Fed were to force the banks to repo it, they are dead in the water. Alternatively, the Fed could auction it through the ABX and get six cents on the dollar or whatever, which would require to Fed to mark cosmic losses against trillions of credit issued that could not then be withdrawn--since the collateral was sold and the deficiency written off.
They can "taper", if they don't mind the stock markets crashing. They can end QE, if they don't mind the bond markets collapsing (because the Fed is now most of the market for Treasury run). Exit they cannot.
IC: good discussion. And the "Fed" is just this conglomeration of banks, Fed would be committing suicide of its owners. Not happenin'
They can exit, it just will take time as the bonds mature and are not replaced.
Exit implies that matured bond is paid, which if done in total, would collapse the system. Instead, there are two options up maturity... the debt is forgiven, or more likely the bond rolled over. Neither of those options sounds like an Exit.
Of course.. who can't see this? You either QE forever (inflation) or let the malinvestment liquitdate....either way most go broke. Got gold? http://tinyurl.com/n8hmfya
The FED can't escape and neither can the BOE or ABE's bank neither.
A central banker nightmare, you use QE to overcome the problem, the growth you managed to induce not being real contracts when you stop or try to reverse all the QE you have done.
The economy and all your metrics adjusted by your own actions and everybody is now so conditioned that this was a good thing how the hell you going to sell it that this is now a bad thing and has to be stopped or removed. On top of that the junk economy you struggled to exsit in for the last 4 years is going to get a whole lot worse.
You really could not make up the above if you tried ... they tried.
Anybody else reckon this is the new normal and the only reason we do not have inflation = growth is because there is no demand to create this new growth all politicians are so desperate for. As for the US / EU signing a free trade agreement will be interesting who is going to be the exploiter and exploited on this one as both are penniless.
[edit] What come first the chicken or the egg, only became possible when growth was tied to the demand of consumption as the primary mechanism.
[edit 2) passing shot as I log for the day a central banker telling you in the future that QE is bad is that not an admittance of guilt? Condemned yourself.
Phase Shift Coming. Major Trand Reversal. Call it what you like it will be HUGE!!! Coming Soon!!
"QE is a helluva drug"
Rick James...bitchez.
QE is like plastic surgery for breast augmentation. Nip here, tuck there, maybe is improve over nature, but once scar tissue is out pace of natural tissue, what is left?!