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Friday, September 14, 2012

Commentary on the Federal Reserve

Obviously much has been said on the Federal Reserve actions on announcing QE3. The general consensus  is that they panicked and that ultimately QE3 will not actually help the economy. I tend to agree with this analysis. Allow me to pipe in my 2 cents on the Fed and offer my take and expand on things a bit:

1.  THEY DID PANIC....somewhat. The horrible August jobs report probably prompted a last-minute change to policy. I don't think they intended to do QE3 as announced (maybe they originally planned something less).  They must be remembered that they did "all they can" especially just prior to a major election.

2. THE FED WAS "JAWBONED" INTO MAKING A QE MOVE. The Fed is another example of the "ultimate herd" in social mood. They heard the chatter of QE3 now for a year --- so they followed trend and did it. Top tick moment?

3. YET THE FED OVER-COMMITTED. The Fed now has nothing left up their sleeve. They just announced they will pledge $85B/month AND other necessary polices (buying the /ES futures for instance?) as seen fit on an open-ended scale! What surprise is left? Do we look forward to any more FOMC meetings? What more could they do? Would a $200B /month pledge do the trick? $300B? Do you see the absurdity in it all?

3A. THE FED CAN TAKE IT BACK. EXIT STRATEGY? This "open-ended" bond and MBS buying actually frees them from reversing policy at a time of their choosing. Prior they had always laid out a specific plan. Now they can buy.....or not buy.  Sounds like the beginning of an exit strategy to me.  SIDE NOTE: When was the last time you heard the term "exit strategy". In 2009/2010 it was all the rage. Not so much now. So nobody is now thinking exit strategy....I am.

4. WE (THE FED) LIKE THIS ADMINISTRATION.  President Obama's administration (and the Democrats overall - not that the Republicans have not been good) have been very kind (maybe not in words but certainly in deeds) to the Fed and the banking cartel. (Sorry but thats the facts). QE3 coming on 5 year stock market highs is very curious indeed. Would they prefer to see Obama re-elected? Do they think they can help influence the election? A political discussion is not my intention of this post but one has to wonder. Perception is important in this context. And the Republicans are somewhat howling at QE3. Overall, Obama has been good to the banking Cartel. Therefore I think the Fed thinks its in the best interest that he remains. We'll see.

4a. ON THE FLIPSIDE IF THE FED WANTS TO DESTROY AN ADMINISTRATION....Post election, fiscal cliff and all, well all they need to do is execute their "exit strategy" and pull liquidity. Just saying.

5. RECESSION AHEAD?  If not a political act, does the Fed know we are likely in recession and are attempting to get ahead of it? The jobs data over the last few months and other data indicate we may have started a recession. This ties into point #1 above.

6. HUBRIS: Ben Bernanke is an arrogant *bleep*. There I said it. I'll explain more in a bit. At the top of a trend (up) they announce they will 1) "Continue to keep rates low likely through 2015".  Oh really? Since when does the Fed control rates?  2) Attempt to control and influence social mood (more on that below) in order to get assets higher in price so people "feel good" and buy more shit and therefore create jobs.

7. THE FED DOESN'T CONTROL INTEREST RATES. I suspect they very well know it but they don't really want you to realize that they cannot control rates unless it suits them to say it like Greeenspan has let out over the years. The market controls rates.  When the 3 month T-bill rises, the Fed will follow suit. Its as simple as that. 

8.  THE LONDON WHALE EFFECT. With that said, they are the major player in trying to influence rates and other markets. However, if you try to become nearly the entire market, you can still lose big. Imagine the Fed owns 2/3's of all MBS in the country. If the remaining 1/3 simply trades among itself at a lower price than what the Fed has marked to market on their books, they lose big.  Hypothetically you can control 90% of the market and still lose if the remaining 10% of the "free trading" asset thinks your price is too high!  

9. THE FED THINKS THEY CAN INFLUENCE SOCIAL MOOD.  This statement by Bernanke is one of the most amazing admissions I have ever heard. It is brutally honest. This is what they think. He said it! Their ultimate goal is to stoke prices in assets and particularly housing. And he lays out the "plan" as such 1) Stoke assets prices (via repo actions with TBTF primary dealers doing most of the dirty work through QE3)  2) People will then "feel richer" with inflated prices again 3) Therefore they will be emboldened to buy shit, and 4) Thus the demand for more shit (housing, goods, trinkets, whatever) will create jobs in the factories and retail that make and sell the shit.

This is really an incredible admission worthy of its own post. I am sorry it is point #9 on the list. It should be #1 for its importance on how the Fed thinks. This admission is it in a nutshell of what the Fed has been reduced to and ensures that the Fed will be doomed to their own destruction. Why? Because external events and actions cannot control, nor influence, social mood. Mood is its own entity moving as it must internally according to Nature's Laws. They would be better off laying low and staying in the background as much as possible.

Oh I admit it can seem like external events controls mood but that is merely coincidence in that they caught an uptrend over the last 3 years. So all the Fed does now seems "omnipotent". Yet if that was true why is there such a mess of things to begin with? Why did the DJIA drop from 14100 to 6500 in 17 months if they could control things? Ahh well. I am sure people will explain that away too.

10. THE FED LAYS CLAIM TO 20% OF AMERICA. With all that said, with all the implied arrogance (they are), implied stupidity (they are), the Fed is still laying claim to over 20% of the United States assets with their sights set on 25% within only a few short years. THIS IS THE IMPORTANT POINT THAT SHOULD JUST PISS US ALL OFF.  Does this make them genius or suicidal?

What right do they have to 25% of the United States? Does anyone not see this?  Not yet. Social mood has not yet turned negative for good. In the end, people will realize what has happened over the last 100 years since the Fed was spawned and come to rue that day. For when the shit hits the fan (and it will) do you think the Fed will roll over? The very nature of banking versus the people ensures that it will be fireworks.

11. THE END DAYS OF THE FED.  When Nature's Laws eventually overtake reality and enforce her rules (you cannot get something for nothing - i.e. money printing), the Fed will be front and center in the spotlight. A predictable result will be that the Fed will "lay claim" to all they have on their books (Mortgages - they will be your landlord). And at the point the system comes unglued that may well be above 20% of the total assets of the United States.   

What right will they have to claim to be America's overlords?  Can you see how they have sewn the seeds of their destruction?  The more QE they do, the more they ensure that the end game will ensure they are disbanded and their assets distributed.  For if they buy 20%, then 25% then 30%, etc, the Fed will ensure they feel the wrath of social mood once the collapse occurs that is sure to come. 

12. INTEREST RATES WILL BE THE FED'S DOWNFALL AND THE FINANCIAL SYSTEM'S DOWNFALL. We have seen a strong glimpse of what rising rates do to deeply indebted countries. We are seeing this in Europe. It will spread. US Treasury bonds have been in a Fibonacci 34+ year bull market.  The Fed can buy 75% of the market but if the remaining 25% trade lower then the Fed loses. Its really that simple folks.  

13. IN FACT ONE CAN SURMISE THAT THE MORE THE FED TRIES AND INFLUENCE A MARKET THE MORE IT WILL MOVE THE OPPOSITE. Thats why this QE3 seems like a "top tick" moment. As I said they launched a bazooka. And yet they took all the surprise out of anything in the future. What is there left to frontrun?

14. RISING RATES WILL CRUSH DEBT AND CAUSE DEFLATION. Pretty obvious examples in Spain and Greece. Stock markets crushed. Their sovereign bonds crushed.  "assets" crushed. Jobs lost. Wages lower. Deflation. Yes its coming to a theater near you.

15. 100 year anniversary for the Fed will be pondered as perhaps a bad thing.  2013. 

16. TOP TICK MOMENT. The Fed's admission of what they are trying to do to create jobs - stoke asset prices - in order make people "feel good" - in order to stoke demand - in order to fuel job growth -  is something that simply floored me. They actually believe this. I believe Bernanke was being his most honest when he answered that question.  The hubris of it all. To actually think they can get rates lower when they are clearly near an all-time downtrend!

17. CONTRARIAN TO THE IDIOT PUNDITS. Most of the pundits (media, newsletters, blogs, etc) accept the fact that interest rates will "likely remain low though 2015" (the Fed had the balls to tack on another year! - The hubris I tell ya!) . Pundits accept that " the stock market will get stoked".  Pundits accept the fact the "it will be a good time to refinance (HEY GUESS WHAT - THAT TIME MAY JUST HAVE PASSED YOU *BLEEPING* IDIOTS).  Pundits accept the "fact" that the "dollar will be destroyed". Well let me tell you, if debt destruction proceeds as I think it will via bankruptcy due to rising rates, guess what, King Dollar will soar!

I leave you with 10Y yields breaking over the downtrend line in what could be wave 3 up. 

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