“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.

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

Two Choices: Restructure Debts or Debase Currencies

John P. Hussman, Ph.D.

Last week, the European Central Bank pledged to spend as much as 750 billion euros (about a trillion US dollars) in an attempt
to discourage market concerns about European debt, particularly that of Greece, Portugal and Spain. The intended message
was to show the markets – particularly bond market “vigilantes” speculating against European debt – that the ECB has deep
enough pockets to thwart the mounting pressure on European debt and the euro itself.

ECB President Jean-Claude Trichet has been quick to deny concerns that the move by the ECB will be inflationary, emphasizing
that the intervention will be “sterilized” in order to prevent a major increase in the amount of euros outstanding. This is “totally
different,” he argued last week, from the massive increase in monetary base that has occurred as the U.S. Federal Reserve has
bought up over $1.25 trillion in debt obligations of Fannie Mae and Freddie Mac. A “sterilized intervention” is one where the
euros created through the purchase of distressed Euro-area debt will also be absorbed by selling other assets from the ECB’s
balance sheet, in order to take those euros back in.

In order to evaluate the arguments being made, it’s helpful to understand the balance sheet of a typical central bank. Whether
in the U.S., Europe, or elsewhere, the basic structure is the same. On the asset side, the central bank has government debt
that it has purchased over time. A small proportion of total assets might be held in “hard” assets such as gold, but primarily,
the assets of each central bank has traditionally represented government debt – mostly of its own nation (or in the case of the
ECB, euro-area governments). As a central bank purchases these securities, it creates an equal amount of liabilities, in the
form of “monetary base” (currency and bank reserves).

Notice, for example, that the pieces of paper in your wallet have the words “Federal Reserve Note” inscribed at the top.
Currency is a liability of the Federal Reserve, against which it has traditionally held assets such as Treasury securities, and prior
to 1971, at least fractional backing in gold.

In this context, consider the ECB’s proposed 750 billion euro line of defense. Essentially the ECB is saying “We stand ready to
buy as much as 750 billion euros of distressed Euro-area debt in order to defend the euro.” Simultaneously, despite the fact
that Euro area countries are running large fiscal deficits, the worst being in Greece, Portugal and Spain, the ECB is saying
“However, we intend to sterilize this intervention, which will ultimately require that we sell Euro-area debt into the market in
order to absorb the euros we create.” The only way that both statements can be true is for the ECB to admit “Therefore, we
are fundamentally promising to debase the quality of our balance sheet, by exchanging higher quality Euro-area debt with
lower-quality debt of countries that are ultimately likely to default.”

Far from being “totally different” from what the U.S. Federal Reserve has done, the ECB is essentially promising exactly the
same thing – to corrupt its balance sheet and debase its currency in order to protect the worst stewards of capital from the
consequences of bad lending and poor investment.

……………………………………………………………………………………………

continued here

The UK, Japan, and the US are at the top of the list.

If the total debt load becomes a concern for the markets, I would expect very
difficult financial conditions.

G7 debt to GDP ratio

Here is the EURUSD COT position

Speculators gambling on Euro collapse

How To Play The Coming Dollar Crash

Curtis Hesler, Professional Timing Service, 04.06.10, 07:10 PM EDT

Last December I headlined my monthly newsletter “How To Play The Dollar Rally.” The short version is that the same technical indicators that were bullish at the end of last year are beginning to transmit bearish omens. There is likely a bit more on the upside for the dollar before it turns, but this final phase of the rally will press precious metals and crude back. It will provide us with a final buying opportunity before the next leg in the commodity bull unfolds.

Here is what is developing. First is sentiment. Everyone on The Street was bearish and was selling the dollar at its late 2009 lows, but there is nothing like a good rally to bring out the bulls. I guess folks just like to buy high and sell low.

There are, of course, those dyed-in-the-wool dollar bears who refuse to recognize the cyclical aspects of the markets. Nevertheless, I am currently seeing more articles espousing a dollar recovery than talk about a return to new lows.

A good number of the dollar bulls are basing their stand on the weakness in the euro. There is some truth to this argument. The euro has been pushed from over 1.50 in early December to about 1.32 lately, and there should be good support at 1.25-1.30.

If you look at the Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI) patterns on a chart of the CurrencyShares Euro Trust ( FXE – news – people ) you’ll note that neither the MACD nor the RSI are making new lows with the FXE. MACD is about to produce a second buy signal replete with positive divergence. The positive divergence in the RSI since it bottomed out in February is also telling us to start looking for the end of this decline in the euro.

The euro is setting up for at least a short-term trading rally. I believe fundamentals will support this. Germany is going to orchestrate assistance for Greece without getting personally committed. The Germans will use the crisis to augment their position of power in Europe — something they have not had for many years. Things will appear better in “euroland” soon, and that will give the euro support. As it finds support, dollar traders will begin selling.

The technical omens are present in the dollar also. It is not surprising that the MACD and RSI patterns that we see in the U.S. Dollar Index are the mirror image of those in the FXE chart. Beyond that, the Commodity Channel Index on the weekly dollar is hovering at +100.00, and a break below that will produce a major sell signal. Bottom line, the dollar rally looks like it has a little more life left in it, but not much. It may even venture toward 83.50, but my indicators are telling us to be ready to use a last ditch dollar bounce to our advantage.

The best way to play the next turn in the dollar is to use the last phase of the dollar rally to build positions in precious metals. You need to do this now before the dollar’s top is in. We have a little time, but not much. I expect that the dollar will find its final rally high by the end of this month.

As the precious metals markets pull back in response to a stronger dollar, we will see some magnificent buying opportunities in individual mining shares. I have reviewed the downside buy prices; and by and large, they are where they should be.

See more recommendations and the full article here.
………..

Be careful and prepared

They use the term of “quantitative easing” to mask the truth for the general
public. Quantitative easing is printing money out of thin air. They also
directed the printing presses toward bailing out very sick US mortgage
market (mostly MBS), although there was also explicit monetization of
treasuries.

Explicit monetization of US treasuries by the Fed is almost equivalent to
default. However, US credit rating agencies continue to rate US sovereign
debt as AAA (surprise!)

It appears China, the largest holder of US sovereign debt, is finally
starting to “get it”. If China is serious about De-pegging from US
dollar, as pressured by US authorities, then we may see US
dollar plunge. For now Chinese currency is pegged to US dollar,
thus, Chinese buying is determined by the peg. Read more in this article in FT.

China is undermining the dollar by the back-door

By Gerard Lyons

Published: April 27 2010 15:50 | Last updated: April 27 2010 15:50

There is a ticking time bomb under the dollar. When it explodes depends not just on the US economy
but also on policy actions in Beijing and Washington. Over the last year the Chinese have undermined
the dollar by the back-door, questioning it as a store of value and medium-of-exchange.

Although the Chinese are not advocating the renminbi as the alternative to the dollar this may be only
a matter of time. One needs to focus on what the Chinese do, as well as listen to what they say. A key
development is China’s encouragement of international use of the renminbi, although they prefer to call it invoicing.

This may be from a low starting point but one Chinese saying may be worth bearing in mind: “A march
of 10,000 miles begins with one small step”. Early signs are promising.

China is encouraging exporters to invoice in the renminbi and is setting up systems to allow trade
payments in renminbi. This make sense. China’s trade is soaring. New trade corridors may soon
require new means of payment. When the Chinese and Brazilian Presidents met last
year they agreed to use their own currencies to settle more of their bilateral trade, rather than
invoicing in dollars. Although viewed as symbolic, it is a sign of things to come.

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