BofA Sees Fed Assets Surpassing $5 Trillion By End Of 2014... Leading To $3350 Gold And $190 Crude

Tyler Durden's picture

Yesterday, when we first presented our calculation of what the Fed's balance sheet would look like through the end of 2013, some were confused why we assumed that the Fed would continue monetizing the long-end beyond the end of 2012. Simple: in its statement, the FOMC said that "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability." Therefore, the only question is by what point the labor market would have improved sufficiently to satisfy the Fed with its "improvement" (all else equal, which however - and here's looking at you inflation - will not be). Conservatively, we assumed that it would take at the lest until December 2014 for unemployment to cross the Fed's "all clear threshold." As it turns out we were optimistic. Bank of America's Priya Misra has just released an analysis which is identical to ours in all other respects, except for when the latest QE version would end. BofA's take: "We do not believe there will be “substantial” improvement in the labor market for the next 1.5-2 years and foresee the Fed buying Treasuries after the end of Operation Twist." What does this mean for total Fed purchases? Again, simple. Add $1 trillion to the Zero Hedge total of $4TRN. In other words, Bank of America just predicted at least 2 years and change of constant monetization, which would send the Fed's balance sheet to grand total of just over $5,000,000,000,000 as the Fed adds another $2.2 trillion MBS and Treasury notional to the current total of $2.8 trillion.

In other words, for once we actually were shockingly optimistic on the US economy. Assuming BofA is correct, and it probably is, this is how the Fed's balance sheet will look like for the next 2 years:

Or, in terms of US GDP, the Fed's balance sheet will have "LBOed" just shy of 30% of all US goods and services.

It gets worse:

Since the Fed is effectively becoming the marginal player in both the MBS and Treasury markets, a very relevant question is how much private market debt is left to sell. Short answer: not much. According to BofA's calculation, the Fed will own more than 33% of the entire mortgage market by 2014.

 That's half the story.

On the Treasury side, in just over 2 years, "Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014." You read that right: in just over 2 years, the Federal Reserve will hold two thirds of the entire bond market with a maturity over 5 years (which by then will be part of the Fed's ZIRP commitment, yield 0% and essentially be equivalent to cash).

No wonder that David Rosenberg is worried that the Fed will soon run out of securities to buy (well, there are always equities of course, but the Fed will not monetize those until some time in 2015 when hyperinflation is raging).

And speaking of hyperinflation (and our earlier note that nothing "else is equal") the real question is if indeed the Fed will own $5 trillion in "assets" in 27.5 months, what does that mean for gold and crude? The answer is plotted below:

In case it is unclear, the answer is:

  • $3350 gold
  • $190 oil.

Luckily the Fed has already factored all these soaring input costs (and "alternative money" prices) in its models, and there is nothing to worry about. Lest we forget, the Fed can crush inflation cold in 15 minutes cold... somehow. Even when unwinding its balance sheet would mean sacrificing 30% of US GDP and, let's be honest about it, civil war.

* * *

That's it in a nutshell. Those who are interested in the nuances of the BofA analysis, which is a replica of our own, can read on below:

The Fed Bazooka

Given our growth forecast, we expect the Fed to follow up the expiration of Operation Twist with an open-ended outright Treasury purchase plan at the December meeting. We expect the pace could be between $45 billion (which would be equal to the current size of Twist) and $60 billion/month for two years [in 10 year equivalents]. We expect a long program given the slow improvement in the labor market as well as the Fed’s focus on a “substantial and sustained improvement” in the employment situation.

Table 2 compares different asset purchase programs by the Fed in terms of the net notional and duration take-out. Were the Fed to engage in renewed Treasury purchases post the end of Twist (in the same maturity distribution), this could easily become one of the largest programs in terms on monthly 10y equivalent demand from the Fed. Note that even MBS buying takes duration out of private hands, which would put downward pressure on rates

Mortgages: Fed buys most of monthly issuance

We estimate that Fed purchases will take out about 60% of monthly MBS production. However, our mortgage strategists note that historically the Fed has concentrated its buying in 30y conventionals. For example, in August the Fed bought $23bn of conventional 30s, $2.5bn of conventional 15s and $3bn of GNs. This compares with gross issuance at $122bn, which is split into $88bn in conventionals ($66bn in 30s, $22bn in 15s) and $34bn in GNs. In other words, the Fed has concentrated 80% of its purchases among conventional 30y. A similar pattern would suggest that the Fed would buy an additional $30bn in this sector, which could end up being almost 90% of all issuance in conventional 30y. This explains the significant tightening in the mortgage basis, and would argue for the Fed to buy some other sectors as well.

In terms of outstandings, we expect the Fed to end up owning more than 33% of the total market by the end of 2014, which is also significant since many mortgage investors tend to reinvest paydowns. These investors would need to be persuaded to sell MBS to the Fed, which would require tighter spreads.

Treasuries: Fed will own a 45-50% in the long end in a year

Given our growth forecast, we expect the Fed to follow up the expiration of Operation Twist with an open-ended outright Treasury purchase plan at the December meeting. We estimate further what the potential ownership of the Fed could look like in the Treasury market over the course of the next two years. We assume that: 1) Purchase sizes are in the same distribution as Twist, sans the sales; 2) Treasury coupon auction sizes remain constant; and, 3) The Fed does not change the 70% per issue maximum SOMA limit.

Table 3 and Table 4 simulate the Treasury universe during the course of 2013 and 2014. Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014. Given the current issuance schedule, we believe it is very likely that the Fed changes its purchase buckets through the next round of Treasury purchases. In particular, the Fed will begin to run out of issues in the 8y-10y bucket and will be forced to buy newly issued 10y notes should they choose to maintain the same distribution. We believe this is unlikely, and that the Fed is likely to redistribute its purchases and possibly include the 5y portion of the curve to provide some room.

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Mr Lennon Hendrix's picture

Inflation was running rampent before the Fed's QEX issuence yesterday, at a clip of at least 7%, but now it will get much worse.  We all know to spend our dollars, which ironically is exactly what Bernanke wants, so what to spend it on? 

Take control of the money supply?  Buy silver and gold.  Find some piece of mind?  Buy food.  Stay safe?  Buy a gun.  Keep the revolution alive?  Donate to Zero Hedge:

agent default's picture

This link back some memories, speaking of which, whatever happened to Marla Singer and Travis? They disappeared after the blogspot days.

Thomas's picture

What's amazing is that the dotted line in the first figure is actually an accurate depiction given detailed knowledge of the Fed's formula.

economics9698's picture

"There is strong evidence to suggest that this is little but false comfort. While we don’t expect material inflationary pressures until the back-half of this decade, the Federal Reserve has increasingly placed itself into a position that will be nearly impossible to disgorge without enormous disruption. Specifically, the U.S. economy could not achieve a non-inflationary increase in Treasury bill yields to even 2% without requiring a nearly 50% reduction in the Federal Reserve’s balance sheet.

This point is easily demonstrated in data from 1947 to the present. The relationship between short-term interest rates and the amount of monetary base per dollar of nominal GDP is very robust, and is widely recognized as the “liquidity preference” curve. We are already way out on the flat part of this curve. Note that Treasury bill yields have never been at even 2% except when there was less than 10 cents of base money per dollar of nominal GDP. There are only 3 ways to get there from the current 18 cents – dramatically cut the balance sheet, keep interest rates near zero for the next decade(assuming nominal GDP growth of 5% annually), or accept much higher rates of inflation than most would consider acceptable."

John P. Hussman

Stackers's picture

Now where did I leave that hockey stick ?

THX 1178's picture

The economy will grind to a halt before oil gets to $190. Has BofA forgotten? 147/barrel... That was BEFORE the economy hit the skids the FIRST time. Now we're in a depression. I feel like we're administered by idiots.

Mr Lennon Hendrix's picture

Tyler posted an article about one and a half years ago that showed world GDP would = 0% when oil was at $180.

If it gets to $180 then we are litterally running on fumes.

nope-1004's picture

Agreed, except Geithner and the other asshats in charge, who publicly lie on a consistent basis, will redefine how CPI is calculated.

I bet when oil is at $190 and gold at $3350, CPI will be 1.2%..... move along people, more QE coming to make you 'wealthy'.


Michael's picture

I heard Ben Swann on AJ's show today and they mentioned Zero Hedge.  I think they read my stuff sometimes.  Thanks Ben & AJ.   

I can get away with saying certain things here on ZH that can't be said in public, so use scruples please.

Reality Check: One on One with President Obama, Why Is The U.S. Supporting Al Qaeda In Syria?

In Arabic, al-Qaeda has four syllables. However, the closest naturalized English pronunciations include /æl-ka-d/, /æl-ke-d/ Al-Qaeda's name can also be transliterated as al-Qaida, al-Qa'ida, el-Qaida, or al-Qaeda.

The name comes from the Arabic noun q'idah, which means foundation or basis, and can also refer to a military base. The initial al- is the Arabic definite article the, hence the base.

Bin Laden explained the origin of the term in a videotaped interview with Al Jazeera journalist Tayseer Alouni in October 2001:

The name 'al-Qaeda' was established a long time ago by mere chance. The late Abu Ebeida El-Banashiri established the training camps for our mujahedeen against Russia's terrorism. We used to call the training camp al-Qaeda. The name stayed.

Ben Swann Interview on Alex Jones - 9/14/2012

Michael's picture

The Muslims just thought to themselves, after all the USA murderous drone attacks on hundreds of our brown women and children to get a few bad guys, and then said to each other, Why let a good Youtube video go to waste?

jeff montanye's picture

good points michael.  my thought re the fed's policy:  if the fed is going to buy (nearly) all the treasury bonds, seemingly bullish for prices, bearish for yields, why did yields blow through 3% friday for the first time since may and prices tank?  things that make you go hmmm?

SWRichmond's picture Hang on to Your Gold

December 7, 2008

How much new money will Bernanke have to print in order to do this? Early estimates (April '08) of the amount of capital destruction ran in the $1.5 Trillion range. Roubini stopped estimating at $2 Trillion, so let's say that $2 Trillion of capital has disappeared. If that $2 Trillion blew a credit bubble at an average 30:1, you have an approximate estimate for the value of global economic activity, so the scale of this number is probably correct. Now, if $2 Trillion in capital has vanished, and if that $2 Trillion had been lent out to create "credit" at 30:1 ($60 Trillion worth of credit), how much new capital will Bernanke and the rest of the central bankers have to print in order to replace it at 10:1? Answer: $6 Trillion.

The central bankers have already done this "back-of-the-envelope" calculation. Bernanke has already, in two months (September '08 to November '08), expanded the Fed's balance sheet by $1 Trillion, from $1 Trillion to $2 Trillion total. He is nowhere near finished.

IBelieveInMagic's picture

The possible flaw in this line of thinking is assuming that Feds will keep buying for as long -- I believe the Feds are trying to put fear of inflation and prod savers to get them off their asses and jump into the pool -- buy up underwater homes, invest, consume, etc. or see their savings turn into crap. In short, accelerate the velocity of money.


Arnold Ziffel's picture

QE1 was not stopped early.

QE2 was not stopped early.

TARP was not stopped early.

I see your point but do not think Ben will risk halting this 'stimulus' plan too soon. With unemployment soaring (just take a look at how many people dropped from the rolls recently), Ben is scared. So is Congress. No one wants civil disorder like we see other places. Thus, more printing not only for bankers but for entitlements which will only expand.


TruthInSunshine's picture

I may be roundly criticized by many here for writing that which I am about to, but it needs to be written by someone.

I'm receptive to any and all counter-factuals rebuttals.

I do not believe I've ever witnessed a greater divergence in reaction or interpretation between what The Fed, whether through Bernanke or Greenspan (or whomever else) has announced, and the kneejerk reaction of markets and of the media "analysts."

The latest FOMC announcement of MBS bond purchasing was a near-nothing burger for the following reasons:


1)  The Fed is buying 40 bln in MBS  (mainly from the GSEs) monthly going forward.  How many have mentioned that the Fed HAS ALREADY BEEN PURCHASING 25 BLN IN MONTHLY MBS FOR QUITE A WHILE?


Result? Another 15 billion in GSE MBS purchases monthly.


2)  The 45 bln of treasury note purchases the Fed "announced" is already taking place as part of "Operation Twist." These are STERILIZED bond purchases that are made by selling/liquidating existing treasury bonds the Fed previously purchased, and are conversely NOT PURCHASES EXPANDING THE FED'S BALANCE SHEET.


Result? Compared to the previous period, none (unless one views a few basis points of possible flattening at the long end of the yield curve significant).


3)  Bernanke did a lot of jawboning about somewhat slightly higher tolerance for slightly higher inflation for slightly longer periods of time as part of what some analysts (COUGHweisenthalCOUGH) claim is a broad, revolutionary, sweeping new re-balancing of the Fed's "mandate," when in reality, there's absolutely NOTHING NEW HERE, as The Bernank has made similar remarks MANY times before.


Result?  Blah, blah, blah...jawboning, yammering & talking into the wind.



It is no exaggeration to say I am shocked at just how many people & sources, but more importantly, some people and sources that I consider intelligent/credible, discuss and interpret this latest FOMC announcement as if it were a capital 'B' Bazooka, when in reality, it's far closer to one of the toy pistols with the flag that pops out with "Bang!" written on it.

If one thinks about the actual MATH & NUMBERS that flow as a result of The Bernank's latest scheme, it's not very noteworthy.

If The Bernank's intentions were to provide some additional (but modest) support to the extremely sick GSEs like Fannie & Freddie,*** while TRICKING THE MARKETS INTO SIGNFICANTLY BOOSTING THEIR INFLATION EXPECTATIONS***, he pulled off a master stroke (at least based on initial reaction).

I genuinely believe the 2nd "Big Short" of risk-on assets has now been firmly & deeply set up, with the last one obviously being more focused on the bursting of the housing bubble in 2007 which then caused wider, downstream, adverse consequences, and with the impeding one being more broad-based and of greater duration.

El Tuco's picture

How to brainwash a nation.

For those Interested....a lttle dated but very relevant today.

Bezmenov explains how Jewish Marxist ideology is destabilizing the economy and purposefully pushing the U.S. into numerous crises so that a "Big Brother" tyranny can be put into place in Washington, how most Americans don't even realize that they are under attack, and that normal parliamentary procedures will not alter the federal government's direction.

Michael's picture

Saw a lot of this guys stuff. We have this stealth propaganda used by a select few on the people these days. We should show this in every high school classroom in the country.

Thanks for the complete link.

Yuri Bezmenov: Deception Was My Job (Complete)

Ben Swann on Alex Jones 9/14/12 PART 1 / 5 (Full Playlist Link)

Clashfan's picture


There ain't no Russians,

and there ain't no Yanks,

just corporate criminals

playing with tanks!

Michael's picture

Try to get through this video;

(Full Movie) "The Police State" Conspiracy -Jesse Ventura

Here's a funny short companion video I made;

Representative Steve Cohen AKA Nathan Thurm

nmewn's picture

No kidding...because no one consumes fuel or food, so theres no reason to include it.

Our best & brightest at work...move along peeps, the newest green hedonic i-shit release is next week!

knukles's picture

Seriously, no worry about food.
What with that new Genetically Modified Crap by Monsanto that's resistant to Price Increases

Eally Ucked's picture

I’m not economist and I try to use just logic to explain what’s going on around me. All those LTRO’s, ESF – something, stimuli and so on is just shit to obscure and make hay of your brain and be in state of owe to those big brains who invented it. They will fix everything but a bit later, maybe in 1 year or maybe 3 years, and then in infinity.

The whole thing is very simple to me:

1. USD as reserve currency gives Americans some space, they will be hit at the end of it, unless some rogue countries get out of it fast, looks that way, so time gets shorter,

2. Thanks to #1 everybody delivers to US something for freshly printed paper, they need that paper (for now) to trade between themselves,

3. For every stimulus from FED consumers in US pay more in cost of energy, 18 mln bpd  usage means that 20$ increase 364*20*18mln=131.04 billion/year about 1/6 of current BB plan.

4. Lets say that BB plan have the same impact on food prices ( I don’t have any numbers on it) 1/6 of his plan, it’s feeding on itself,

5. BB plan causes much inflated prices for food and accommodation in third world, revolutions and disruptions, that feeds into prices for domestic and American prices,

6. Cost of pacifying and keeping in line those rogue partners rises,

7. It’s fun to watch FED economy – building housing in desert, more jobs, more energy needs, more materials coming from other parts of world and everything financed with their bills,

8. And most of fun comes with what they will do with 2/3 of stimulus, they will buy all that shit, underwater paper from your friendly banks to improve their balance sheet!

9. Europe is exactly in the same situation except they can’t print freely,

10. The game is to reflate evenly, so nobody notices it. There are some kinks, those pesky Moslems, Hindu, Chinese and others.

11. Who the fuck invented those FX pairs? All those fuckers using the same rules, probably they had some summit to fix them for idiots.

neidermeyer's picture

That's not much of a prediction if you look at the increases given out in SocSec... of course they'll fudge the number down to 0%. 

Jack Burton's picture

True, oil at this price will kill the American consumer. Now lets consider the Fed liquidity pouring into commodities and Mid East instability and hope for $190 a barrel as best case scenario!

I can already see the Canadian Tar Sands investors and corporate CEO's cheering the news. They may have got in on one of the great oil plays of the early 21st century. At those prices Tar Sands are a bonanza!

Bernanke will not stop till his money printing has increased asset prices for the 1% and has increased gas and food prices for the 99% to intolerable levels.

Bernanke is simply engaged in wealth transfer. America's middle class is clearly doomed in this type of economic model A model of money printing.

As Marc Faber just said, Bernanke will destroy the world economy and only enrich the 1% who hold most equity positions.

To be blunt, Bernanke an evil force in this world. Yet Obama allows him to continue. How is Obama a socialist when he enforces a a Fed policy that transfers wealth to the 1% while killing the 99%?


juangrande's picture

When Obama announced his Tres. Sec. and his financial advisers in 2009, it was obvious what was always obvious!

L G Butz PhD's picture

true if you knew that Volker was only window dressing when appointed

Go Tribe's picture

Seems to me that since bernanke works for a dozen or so banks, his actions would be in favor of banks and their wealthy owners. How is it that the Fed was ever given such power? Can't we make it illegal for the Fed to purchase debt?

jez's picture

"Can't we make it illegal for the Fed to purchase debt?"


What difference would it make, making it illegal?'s picture


How is Obama a socialist when he enforces a a Fed policy that transfers wealth to the 1% while killing the 99%?


Socialism grows out of envy. Big government powered by envy efficiently transfers wealth from those who are willing to work for it to those who are the most covetous of it. Socialism is institutionalized sociopathy.

jeff montanye's picture

so the robber barons were socialists?  they used government power to protect monopolies, most famously railroads but mineral resources as well.  this may make sense to you but i'm not sure it's universal.

socialism may be a kind of institutionalized sociopathy, but, perhaps, not precisely of this sort.  crony capitalism seems more apt but as the bard has it, a rose by any other name ....'s picture


so the robber barons were socialists?  they used government power to protect monopolies, most famously railroads but mineral resources as well.

Anyone who claims a right to a bigger piece of the pie than they are willing to work for under the guise of that redistribution being for the public good is a socialist.

Arnold Ziffel's picture

I agree. I see oil at least $150 in six months....maybe sooner depending on "geopolitical" events in MENA and Senkaku area.

Wait until Russia grabs their Southern Kurile islands back from Japan:

asteroids's picture

Poverty and famine will return to the US. The lower class plus a huge number of seniors will suffer. Whole generations in misery. Well done FED and POTUS.

Caggge's picture

Romney says the middle class makes 200k to 250k. How far out of touch can he be?

topspinslicer's picture

he is very much in touch -- that is how much we will need to make

Harbanger's picture

Its about setting a tax ceiling for the "middle class" after which you're taxed at a higher rate.  It's not uncommon for a small business and/or professional married couple make 200-250K a year, especially in a good economy.  Simply put, Obama would tax these people at a higher rate than Romney.

maximin thrax's picture

Don't forget props to pols who have shepherded generations into government dependency.

trebuchet's picture

Article says the Fed will own more than 33% of the entire mortgage market by 2014.

OH come on! NO way!!!!    

The banks are just going to create new ones since they can flip to the Fed:


New mortgage growth?? + 40bn per month -

"Roll up, roll up get your mortgage on your mortgage here..."



overmedicatedundersexed's picture

seems like LTCM (look it up nubes) is the inspiration of our PHD econ types at the FED..making the same mistake by becoming the Market, now who will be the counter parties to bring em down?

trebuchet's picture


I had said open ended MBS based QE was on the cards in an earlier comment:


Why is this open ended QE revolving?   

because of the moral hazard problem i outlined above: banks now have incentive to create mortgages and flip to Fed. 

How does Fed stop this? 

1. regulation of banks (yeah right)

2. sell MBS back into the market  (operation Re-Twist :-)  )


When will it launch? 

Once house prices are once again on upwards trend and the Sheeple (Fed induced) wealth effect kicks in: Fed expects people to feel richer and start spending at  a faster rate. 

The Fed has now entered the terriotry of managing house prices in the US apart from stock markets. 

Buy those properties NOW.... preferably one that can be easily defended.


JohnKozac's picture

The Fed is going to help the FHA turn all of those houses into low income rentals. The Fed supplies the newly printed money to the FHA and they "buy" all the 'toxic mortgages' from the bankers (after, of course the banks took their profits and bonuses) then they simply convert these houses into rentals for low income people.

So be careful what neighborhood you buy in...check out how many houses are underwater b/c your area may be the next low income neighborhood.

It's called, "progressive thinking."

chunga's picture

Here's some creepy shit from FHFA...this is like living in a bad dream.

(Chicago Tribune 9/13/2012)

Mortgage cops taking tough stance

Strategic defaulters, beware. The feds are coming for you. And they are not happy. Not the FBI. The Office of the Inspector General at the Federal Housing Finance Agency. The OIG may not have the same fearsome "G-man" reputation as its better-known counterparts at the Federal Bureau of Investigation, but it is every bit as much a law enforcement agency, with the same powers to search, seize and arrest.


Special OIG agents are even authorized to carry firearms. The OIG's mission is to seek administrative sanctions, civil recoveries and criminal prosecutions against anyone who abuses the FHFA's programs. And it is pursuing its calling with passion, if not vengeance.

Michael's picture

US Government was warned numerous times of an attack on 9/11/2001 and even helped it happen.

Heckler brands Tony Blair a ‘war criminal’ over JPMorgan payments

Tony Blair Confronted At Leveson Inquiry

Clashfan's picture

"Helped it happen" isn't nearly strong enough phrasing.

strannick's picture

Question now is, how will the Imbecilic Academic Govt Progessives like Obama start stealing your wealth after their absolute ineptitude at managing the economy is revealed, and how to prepare against it.

NewWorldOrange's picture

Prepare? For what, pre-revenge? That's about all that's left to "prepare" for. Skynet is here, and about to be all over the globe. The drones raining missiles on Muslim civilians is just foreplay. It'll soon be just like the movie, except that in the movie, the bots were low flying and relatively easy to take down. The Big Collapse may send most of us into a grave or the stone age, but technology will still be here and more used for military and "policing" than ever.

Wake up people. It's too late for any kind of dignified, comfortable life. We're spiraling down now, fast. The Oil Dollar Party is over. Great party, while it lasted. All that's left to the people alive today is an endless littany of every kind of horror. The only sensible thing left to do is get laid. The day will come when you'll wish you'd just sold all that bullion and took a long trip to Amsterdam for some window shopping.