Red Adair put out oil well fires by setting off gigantic explosions at the wellhead. “My belief is that the Fred Adair solution
is to blow up or burn the OTC market in credit default swaps,”
Instead of doing what Scholes, the father of LTCM, suggested, we continued to feed the monster through bailouts, QE1, QE2 lite,
and QE2. Until the outstanding contracts are neutralized, the markets will remain a delayed time bomb waiting to explode
as soon as the Fed stops the flow of liquidity. If the Fed keeps printing and kicking the can down the road, the imbalances
and blowups that follow will only get worse.
It seems nationalization and/or cancellation and strict regulation of these contracts is the only solution, similar to treaties
and nuclear arms agreements between countries with nuclear weapons. These are financial WMD, tied to real dynamic
markets, they should be handled in a similar fashion.
With the decision of “Operation Twist” by US Federal Reserve to rotate 400 billion dollars
from short maturity T-bills to longer maturities and no new printing, the economic recovery
can no longer be sustained. The Keynesian policymakers are out of bullets as we descend
into post credit bubble economic depression. Operation twist was not what the market
anticipated, the market anticipated QE3. Without further printing or stimulus we anticipate very
rough waters ahead for the economy and the markets. The economic indicators point that a
second recessionhas already started.
I expect that even gold could be vulnerable to a further correction, although, compared to other
indexes it should be mild.
To support a stronger economic recovery and to help ensure that inflation, over
time, is at levels consistent with the dual mandate, the Committee decided today to extend the
average maturity of its holdings of securities. The Committee intends to purchase, by the end of
June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years
and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.
This program should put downward pressure on longer-term interest rates and help make
broader financial conditions more accommodative. The Committee will regularly review the size
and composition of its securities holdings and is prepared to adjust those holdings as
The wait for QE2 is now over, the Federal reserve announced a new money printing program today.
The Fed will print 600 Billion dollars by the end of June 2011,
which is on top of $30 billion or so printed every month related to their QE lite.
The printing effort will drastically increase monetary base and devalue the currency, the US dollar. While
the short term effect is unclear – the market expected as much as $1-2 Trillion in newly minted dollars,
keep buying precious metals on every dip.
The new printing program is unlikely to help the economy, as inflation so created by the Federal reserve will
push prices of assets not backed by debt far higher than assets backed by debt, such
as houses. Nevertheless, this author expects stock prices to close higher for the year, because in the environment
of rapid devaluation of the currency stocks do better than bonds.
Given recent monetary policy decisions, it appears likely that the Fed will keep printing money until the cows come
home, so be aware that the dollar now has a rapidly vanishing value and invest accordingly.
Gold price target for the year used to be 1455, however, it is unclear how high the metal can soar in this tragic environment.
As stated here, the precious metals market usually experiences a healthy correction
from mid-October until mid-November due to the end of Indian festival Jewelry demand.
The seasonal bull move ends in February. Add to that excellent fundamentals for the precious metals as US Federal Reserve is
contemplating another major devaluation of US dollar (Quantitative Easing 2).
There is only one action – buy this dip!
October 18, 2010
The Recklessness of Quantitative Easing
John P. Hussman, Ph.D.
With continuing weakness in the U.S. job market, Ben Bernanke confirmed last week what investors have been pricing into the
markets for months – the Federal Reserve will launch a new program of “quantitative easing” (QE), probably as early as
November. Analysts expect that the Fed could purchase $1 trillion or more of U.S. Treasury securities, flooding the financial
system with additional bank reserves.
A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving
real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly
increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate
objective of increasing U.S. output and employment.
From August, 10 Fed meeting statement:
“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal
Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency
mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal
Reserve’s holdings of Treasury securities as they mature. ”
US Federal reserve has 18 billion in Treasury bond coupon passes scheduled for the next 30 days
Formally this means what the Fed has already printed will not be sterilized and will be rotated into treasuries as
MBS on balance sheet mature. The Fed stated they will keep their SOMA account unchanged at $2.054 Trillion.
However, we wonder if the Fed will actually engage in covert printing under the table. One obvious way to do so
happens when the MBS trash on the Fed’s balance sheet defaults. Then there is “double printing”. The first time
was when the Fed actually bought the trash from the banks, the second time when it defaults and the Fed “replaces”
it with treasuries, while keeping it’s SOMA account unchanged.
For example, if ALL MBS trash were to default, the total amount of printing would be a double of what the Fed
allocated to MBS in QEI – the first time printing happened when the Fed bought MBS from banks at face value,
creating money out of thin air to do that. The second time will happen when the trash defaults and the Fed creates
that money AGAIN to buy treasuries.
Many now argue gold is in a bubble. Indeed, in recent years demand for gold
as an asset went sharply higher. However, if history is an indication, more likely
than not this will result in enormous gains in the years ahead. Gold is going up
for fundamental reasons, Quantitative Easing (money printing) around the world
and in the US in particular.
Jesse repeatedly argued for bullish cup and handle
formation in the gold market, which is not broken while gold stays above 1160.
The pattern has a target of 1375, which will most likely be reached during the bullish
gold season, August through February.
The seasonal chart for gold is below, from 321gold.
Typically gold bottoms in July, goes mildly higher in August, then takes off in September.
The situation was different in 2008, but that, perhaps, happened due to a sharp rally of the dollar.
Gold reached a new all time high in many major currencies in late 2008.
The recent bounce of the Euro led directly to a sharp drop of the dollar index.
This was, perhaps, in part due to the ECB country bailout measures, in part due
to the talk of new Quantitative Easing measures (money printing) by US Federal reserve
due to commence soon. There was much talk, but so far no action, which leaves the
trap door open for a possible disappointment in mid-August, since the Euro
got very overbought. The 60-day regression analysis for Euro/US dollar pair
from UBC is shown below.
This was bullish for equities. A quick note here that the convergence target
for SP500 with inverse USD index moved much higher, to about SP500=900.
WASHINGTON (MNI) – Nomura Friday became the first major firm to formally anticipate a change in Fed
policy as soon as August 10 to alter course toward some renewed quantitative easing, arguing that without the
change, Fed policy is becoming less accommodative week by week.
“We think there will be something in the (FOMC) language that maybe reverts back to the language of 2009, around
the first time they made this statement, that the Federal Reserve needs to maintain an expanded balance sheet,”
David Resler, chief North American economist for Normura, told Market News International.
“That begs the question, what does that mean to expand,” he continued. “We don’t think they will actively buy
things,” he said, but that they will have to “back up their language.”
While the Fed now is committed “only to rolling over guvvies,” he said, “they are becoming less accommodative each
week. Mortgages are not being replaced” and other shrinkage is taking place.
“They need to have a strategy for preserving (the balance sheet’s) size. Does that mean they will reinvest paydowns.
I don’t know, and we’re agnostic on how they will do it.”
Just lowering rates “is not on the table any more,” he said, and changing the rate of interest on excess reserves “is
the last option they would resort to.” At present “they are losing assets, so I think they would not want to lose them.”
Read more here
This chart illustrates how bad things are around the globe following financial
crisis. US and UK, while not downgraded yet, are close to the top of the list.