Its official! We are now officially Financing ourselves!
That's all I can say in response to the Fed's announcement that they will be purchasing US treasuries. Here is the big news from Bloomberg:
"March 18 (Bloomberg) -- The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.
The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer- dated Treasuries in decades. Officials unanimously voted to expand the Fed’s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today’s statement showed.
With today’s move, the Fed has committed to buy or loan against everything from corporate debt, mortgages and consumer loans to government debt, after cutting its benchmark interest rate to zero failed to end the credit crunch. The unprecedented campaign comes after a worsening recession sent the unemployment rate up to a quarter-century high of 8.1 percent."
I am still in shock that Ben actually pulled the trigger. 10 year treasury yields collapsed on the news:
So what does this all mean?
It means the world will never be the same. Let me start with the good news. This is the refinancing opportunity of a lifetime. If your job is stable and you have equity in your house, by all means refi!.
OK, back to the grim reality of this situation:
The fact that the Ben actually decided to actually risk going down this dangerous path tells me that the Fed has seen some type of economic ghost. The dollar collapsed on the news.
The risk of "unintended consequences" is extremely high here.
Think about it folks, WE ARE NOW OFFICIALLY FINANCING OURSELVES. What type of message do you think this sends to the countries that buy our debt? Gee, do you think they might be a little nervous about the value of their treasuries as they see us wallowing in trillions of dollars in debt? The Fed's balance sheet just grew by $1.15 trillion today alone and now totals more than $3 trillion dollars.
What the Fed announced today may very well lower the demand for treasuries going forward:
You see, US treasuries have always been considered to be the safest investment on Earth. Buyers around the world crowd into US treasuries when they are looking for a "safe haven" because they are extremely confident that they will be paid back. However, after Ben's desperate expansion of the Fed's balance sheet, Investor's now gotta be asking themselves: Is this still the case?
We need to ask ourselves a few other questions here:
1. Did the Treasury decide to buy their own debt because demand began to wane worldwide?
2. If this doesn't work, then what?
3. Will the banks pass on these lower rates to customers or will they try and pocket the difference in an attempt to bail themselves out?
4. How are we ever going to pay these trillions of dollars back?
5. Is the Treasury Market turning into the biggest bubble of them all? What happens if it bursts?
6. Will China and Japan continue to buy our debt OR decide that now is the time to SELL because the Fed is now buying?
7. Where does the Fed draw the line in terms of how many treasuries they will buy?
8. Do we risk a bond market dislocation as a result of all of this? How can a Chicago trader trade bonds when there is an 800lb gorilla in the room(the Fed) that could wipe him out at any second.
As you can see, there are many risks by going down this path of quantitative easing. There WILL be unintended consequences here folks. Its going to take some time for the market to digest all of this, but when it does: Look out!
In my opinion this is a huge mistake. We are basically trying to reflate a massive debt bubble. As I have said before, BUBBLES DON'T REFLATE.
What the Fed has essentially done here is used its balance sheet to replace the investment banks Ponzi like leverage. The problem with this theory is the consumers balance sheet remains DEleveraged. No one has the money or appetite for risk that's needed in order to take advantage of all of this cheap Ponzi lending.
As a result, this can't work. You can't reinflate one side without reinflating the other. Consumer's are still up to their neck in debt and losing their jobs. This hardly sets up a scenario where they want to borrow. If anything, they would prefer to throw any extra money they have under the mattress because they are terrified they may lose their job.
The economy has been destroyed, and today's desperate actions by Bernanke confirms this. The Fed is trying to temporarily use its balance sheet to "triage" a patient that's already dead.
Remember folks, we have seen this show before in Japan:
As you can see above, lending COLLAPSED after its bubble burst in the early '90's. No one had any appetite for risk after getting burned so badly as a result of their deflationary spiral. The same "quantitative easing" that we announced today was also attempted in Japan in the 1990's. You can see how well that worked out.
Bernanke's now officially out of bullets. Expect this policy to fail miserably just like it did in Japan. How does this all play out in the market? Tough call. Stocks at these levels are simply too risky for my taste. I could see them heading in either direction. Stocks retraced to close up 100 points after soaring nearly 220 points following the announcement.
The bulls will attempt to keep the momo going by playing the "reflation" trade following the Fed's spending orgy. Expect energy and commodity stocks to move higher if the market continues to bounce. I could also see a scenario here where the market asks itself "now what?" and then proceeds to sell off.
Remember, the market hates uncertainty. I don't see how things could get more uncertain with the Fed now officially involved in the treasury market.
Watch the 800 area on the S&P. If the market fails to move higher from these levels I will be inclined to jump in on the short side. IMO, Don't try and front run this freight train. Let the market sort this all out first before you get too bold.
Stay tuned folks and god help us all if this doesn't work.