Wednesday, May 20, 2009

The Fed's Fiasco

Alrighty Folks,

Lets get right to it and head straight to the credit markets. I have been talking a lot about treasuries and the Fed's ridiculous quantitative easing policy in recent weeks. This QE plan was doomed from the start, but I realized it would take some time before the Fed blew itself up as it attempted to finance itself by buying its own debt.

My thesis all along around the Fed's massive spending has been pretty simple:

There would eventually come a point in which the bond market would pull a Jerry McGuire and yell "Show me the Money Benny" to the BB and the Fed as they spend themselves into oblivion.

The bond market would send this message by ignoring the QE policy by the Fed and continue to take yields higher. Basically if this was Texas Hold'Em poker, the Fed went "all in" when they announed their QE policy a month or so ago. The bond market is about to call the Fed's bet bet because they don't believe the Fed has the ability to pay back what they are spending unless they flat out print.

If the Fed loses(which we all know they will), they will be forced to massively cut spending because they can't afford a printing scenario where hyperinflation gets put on the table.

Today, I started to see some signs that this "come to Jesus call" on the Fed's "all in" bet may be closer then we all realize. I say this after seeing what the 10 year did after the Fed's announcement of a large treasury purchase :

As you can see by the chart above, the Fed was somewhat successful in getting the 10 year to back off a bit today(although yields are still above the Fed's target of 3%). However, what I thought was interesting was how the 10 year closed. Yields began moving sharply UP at the close as stocks began to sharply sell off in the last half hour of trading

We should have seen the exact opposite occur folks. Treasury yields should have dropped into the close as stocks sold off because investor's usually move from stocks into the safety of bonds when the market moves down.

The QE announcement from the Fed should have exacerbated this move into bonds at the end of the day as the market went red. The fact that the exact opposite(stocks down/yields up) occurred is something to take note of. So basically both stocks and bonds sold off. Panics occur when no investment appears safe. This is what happened in 1932. I am not insinuating that we will see a panic sell off, however, this bears watching closely tomorrow.

You gotta wonder: Has the bond market finally had enough of this asinine spending?

There comes a point in time where all of this spending by the Fed begins to look absolutely ridiculous. I figured that the credit markets would allow the Fed to run massive deficits up to a point when this whole economic nightmare started. The bond market has a vested interest in avoiding an economic collapse. Remember, bonds and stocks both get killed in depression's.

So as a result, Chicago gave the Fed some slack and allowed them to ramp up spending hoping that perhaps the Fed could avoid an economic collapse by expanding its balance sheet. I think the bond market knew this wasn't going to work but said to themselves: "Why not give the Fed a shot? Maybe they can pull it off ?".

However, once they saw QE was going to fail(an inevitable conclusion IMO), I expected to see bond traders shove it right up Ben's ass by taking yields through the roof.

US Dollar collapse

The Fed's QE policy continue to to heavily pressure the dollar. Our currency continues to collapse as the Fed continues to spend money that it doesn't have:

My Take:

The 82 level was considered to be a critical support level for the dollar. As you can see above, we sliced right through it like butter today.

This is not good folks. Inflation is going to be a serious problem moving forward if our dollar continues to slide because many commodities are priced in US dollars. Metals and commodities should continue to work well here as the Fed spends itself in bankruptcy. This spending weakens the dollar which then increases our cost of living. Inflation is now a HUGE risk as a result of our collapsing currency.

This will only further fuel the deflation seen in large assets like housing. One might think housing prices would go up in an inflationary environment. Nope! Higher costs to live mean that the consumer has less money to spend on big ticket assets like a home because the consumer only has so much disposable income. Expect devastating deflation in housing if our currency continues to collapse. YOU CAN HAVE INFLATION AND DEFLATION AT THE SAME TIME. We are witnessing it right now.

Bottom Line:

The uptick in yields as the market sold off was an ominous sign today folks. If the Fed begins to lose control of the yields in the bond market the game is OVER. They will be forced to pullback spending in such a scenario. This means the bailouts will stop and the debt bubble collapses.

I am long hard assets(gold) and short the S&P right now. I may pick up a commodity ETF later this week. I am currently researching a few.


I have had a few requests from readers asking about where they should buy their gold. Here are a few places that I recommend: A second idea is The spreads are fair at each place and the deliveries are quick from what I have heard from some friends. Hope this helps.

I think the trades above will work as long as the Fed continues its QE policy. The Fed is slowly digging themselves into a hole that they will never be able to climb out of. This will only further pressure the dollar which will be the death blow for our consumer that is currently drowning in mountains of debt.

How are corporate earnings going to rise when people need to spend most of their money on the bare necessities? How many Apple I-Pods can the consumer buy as they pay off their maxed out credit cards and bloated mortgage payments?

The Fed has a serious decision to make. Here are the two choices the way I see it:

1) They could continue to spend like drunken sailors and watch the consumer sink as massive inflation inhales all of their rapidly declining wages. Soaring inflation also increases the risk of a total economic collapse. Social chaos and the destruction of our government are very possible if inflation runs wild. Millions of Americans would become traumatized as the cost of living would rose to unaffordable levels. Families would be forced out their homes, and bread lines like we saw in the 1930's would become a common occurrence.

Our consumer driven economy would then completely implode because any money made at work would be used to survive.

2) They can stop the spending, let the debt bubble burst, and allow a resetting of our economy back down to affordable levels for the average American. This would be devastating to the economy short term as bailed out banks and companies would fail on an epic scale. However, letting this reset occur allows us to get that much closer to the recovery. I have no doubt that we will recover folks. we are the most resilient nation in the world IMO.

My vote of course is for option #2. Both are painful but at least #2 allows us to get back to affordable living. Its time to mark an end of the Supersizing of America. Its time to get rid of the McMansion's, send the Hummer to the junkyard, and get back to the basics where we all live within our means.

I don't feel like being a debt slave for the rest of my life as a result of being forced by the government to pay for someone else's speculative mistakes. The spending is never going to stop until we rise up and say ENOUGH ALREADY!

The Fed, Wall St, Fannie and Freddie, and greedy investor's are all just a bunch of obsessed speculators. They all take turns wasting our taxpayer dollars. Most recently its been the Fed's turn to speculate and blow up bubbles. Treasuries anyone?

Reckless Speculation must die before this greed takes our country from us.

Its time to make the tough decisions everyone. What's is gonna be?


Flipdippy said...


Inflation or deflation, which side are you on? You've been aggressive on deflation, why the change? Either way, welcome to the other side.

We pretty much tagged every resistance on the S&P in the am. Could be a quick and rough ride down to the 700s over the next week or two.

Don't underestimate silver miner and silver stocks like SSRI. I think they have a lot more upside than gold.

Also the gub said they are ready ton continue buying treasuries...there is an escalation of arms going on...I am stumped at how this all ends.

Jeff said...


Both. I updated my post a bit in order to explain. I think we will see housing deflation and price inflation at the same time.

The combination of the two will be devestating. I have never been so bearish.

I love your silver call BTW. Thats a great idea. The dollar collapse cannot be ignored. Inflation is now a big time risk.

I wish I had the answers too Flip.

Everything keeps getting worse and worse. I am speechless in terms of watching the government response to this crisis.

The policies are a complete nightmare.

Ughhh...I think I need a drink!

Radar said...

Nice post Jeff. I love your rants as they justify my loosing short position in the S&P. And God knows, I hope your wrong because I don't want apocalypse now. But if your right...I hope we'll be ready!!

And again, well "spoken"...

Jeff said...



I have lost my share on some shorts too.

I don't want armageddon to happen either but if its unavoidable I say lets get it out of the way so we can move on.

I have feeling the Fed is going to fight this to the death which will only prolong the agony.

I like my band aids pulled off quickly. Its much less painful.

I gotta feeling you are going to like your shorts in the very near future. this 900 on the S&P has been quite a battle between the bulls and the bears.

I am thinking we are ready for a push down here later this week. The bulls need to get this back to 930 soon or they are in trouble.

I also think the Fed may pull some liquidity in order to help out the struggling bond market.

Good luck with your trades!

flipdippy said...

Something ain't right with the markets gut says we are going to see a violent, violent move down.

Hope it isn't so because I haven't loaded up my shorts.

Jeff said...


Lots of bad news today.

UK possibly may lose their AAA debt rating. This is HUGE. This stokes concerns that the same thing could happee here.

Jobless claims rose higher than expected. Up to 631,000.

GMAC Needed another huge cash infusion from the Fed.

Lots of worries today. Lets see how we close.

Tomorrow will be interesting because who in the hell will want to own stocks heading into the long weekend if things look shaky.

Lets see what happens!


Anonymous said...

Look at the 10 year run...shizen

Anonymous said...

can the rising yields stop FED QE and and US goverment insane deficit spending?

I believe that all effects of deficit spending and QE will be simply deleted by higher interest rates -> the money will evaporate somewhere else as rising interest rates will cause a bigger and faster deflationary collaps. therefore QE and deficit spending will make only things worse.
once interest rates are 10%, the goverment wont be able to spend a penny in a deficit.

but thats just one my cent.

the hardest thing is to imagine, what assets will rise in such enviroment. I can easily imagine gold getting sell out with 10% interest rates as everyone with some kind of debt will try to get a cash.

however I own gold too.

Anonymous said...

not that you need to do it but... when you say "i am long" or "i am short" would be very nice if you qualify it with some percentages like "i am 10% short, rest in cash". That will give us some idea on the level of conviction you have on your predictions on market direction. If you are short 100 shares of SPY or long 100 shares of SDS - that could be just your lunch money :-)

Jeff said...


Yup 10 year is screaming higher. That uptick late in the day yesterday was warning from the bond market. Been short treasuries for a month now via tbt

Bill gross is out warning that the usa aaa credit rating is at risk

Hold on tight today

Jeff said...


If yields soar to 10%. It will sign that the qe policy failed.

U are correct. The fed would be forced to stop spending which would induce a deflationary collapse.

The fed may have to pull liquidity from the stock market in order to prop up treasuries. Stocks will drop if this occurs

Jeff said...


I only trade 10% of my portfolio. The rest is in cash and fixed income.

I will disclose my percentages in terms of my trading account.

I will disclose my holdings tonight. I prefer not to disclose the number of contracts for privacy reasons

Anonymous said...

I only trade 10% of my portfolio. The rest is in cash and fixed income.
thanks, that was more than enough

jeff said...

Post up around 6:30