“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.

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.

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

Stocks vs 1/USD

Below is a chart of 10-year interest rates (TNX) vs SP500. As you can see, the
disconnect developed as a result of October 2008 crash. The two later re-connected.
Shortly after October 2008 crash there was a major opportunity to be long T-bonds.

SP500 vs 10-year T-bond interest rate

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

We have warned in recent months of upside risks to UK inflation, plus the risk
that the election will produce a hung parliament which is unable to quickly
establish a credible path back to fiscal sustainability. These worries have not
been calmed by the Budget and latest inflation data. Gilts and sterling remain
vulnerable, and the MPC may feel compelled to hike rather earlier than
markets project to cap inflation expectations.

Budget Fails to Establish Path Back to Fiscal Sustainability
The Budget acknowledged that this year’s deficit will undershoot the PBR
plans by about £11bn, largely because of a revenue rebound, but failed to
tackle the UK’s medium-term fiscal outlook, which is the key issue.
The government’s fiscal forecasts remain relatively unambitious compared to
other high deficit countries. The Budget projected that the fiscal deficit will fall
to 4-4.5% of GDP in 2014/15, whereas other high deficit EU countries expect
to get their deficits to 3% of GDP or less over that timeframe (and generally
before 2014). As a result, the UK government continues to forecast a more
extended rise in the public debt/GDP ratio than other EU countries, with the
debt/GDP ratio not peaking until 2013/14 – a year later than Portugal,
Ireland and Spain, two years later than Greece and three years later than Italy.

Moreover, the UK lacks credible plans to achieve even that relatively
unambitious fiscal path. The government’s fiscal forecasts rely chiefly on a
plunge in the public spending/GDP ratio from 48% in 10/11 to 42.5% in 14/15.
But, these are just forecasts. There are no plans for either total public
spending or for spending by individual government departments beyond the
10/11 fiscal year. Without these, the fiscal forecasts lack credibility.

See the full report 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