Wednesday, November 3, 2010

The Aftermath of QE2

Well let's get this one started.  The Fed stepped up to the plate and announced QE2 as expected.  Here is the money quote from the FOMC statement:

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

My Take:

I don't even know where to begin.  Let's start with the last statement where the Fed will "adjust the program to foster price stability".

Price stability?  Really?  Take a look below and tell me how that worked out today?

Let's start with the 30 year bond following the announcement:

The 10 year wasn't much better:

Oh and the dollar?  That fell too after announcing that we will print $600 billion more dollars out of thin air:

Take Continued:

Another question.  How is any of this "fostering maximum employment"?  Since when did the Fed start creating jobs?  How many did QE1 create?  With unemployment at near all time highs you already have the answer to that one.

I could easily start ranting like a lunatic right now but I am going to try and refrain from doing so.  My mild rant above is all you are going to get.

All I can say is this has gotten beyond absurd.  I cannot believe what I am witnessing and I am serious as a heart attack when I say this.

However, it is what it is so let's break down what happened today.


The trading robots were once again able to keep things contained.  You can expect to see less and less stock analysis here at the THTB.  There is nothing to analyze.

The computers rule Wall St and their trading volumes morph anyone else that's currently involved in the markets.  As a result, whatever the trading algos decide to do on any given day is where the market will move. 

This can't last forever because the trading algos are not prepared for the "black swans" that inevitably will hit this market.  The Fed made sure that we will see one of these swans after today's spending spree.

The market is now filled with price distortions, bubbles, and fear.  One of these will inevitably create a selling panic, and god only knows how the trading robots will react to this....Flash Crash Part 2 anyone?


This is where the action was today.  The robots can't control the credit traders(who are a much more sophisticated bunch despite being human).

Yields soared and bond prices collapsed on the QE2 news.  One might have expected the exact opposite price action in bonds.  I think the credit traders were OK with the $600 billion number(as absurd as that sounds).  However, I don't think they liked the open ended language that followed it where the Fed promised to adjust their program if needed.

This was very aggressive on the Fed's part.  They should have just announced the $600 billion and then kept their mouths shut.  At most, they should have said that they will continue to monitor the situation.  They didn't need to discuss "adjusting the program" if needed.

This was a sign of desperation in my view, and the bond market responded by immediately worrying about money printing and massive inflation/hyperinflation(as they should).

As a result, they began dumping treasuries, and the selling got more aggressive as you went up the curve because the risk of high inflation is much more damaging to longer dated treasuries like the 30 year bond because of the duration of the investment.

The Bottom Line

We are now officially in uncharted waters.  The whole market at this point is now being propped up by toothpicks, the Fed,  and trading robots.

The US dollar was relatively quiet given the action in bonds.  There were reasons for this.  Things in Europe are detiorating rapidly.  One of Ireland's largest banks CDS swaps are now pricing in a  >60% chance of default.  Here are the bank spreads below:
This obviously pressured the Euro today and helped the dollar.  Russia also didn't help things after announcing it will exclude Ireland and Spain from it's sovereign wealth fund actvities.

All in all, things are going to hell in a handbasket.  There is no other way to interpret things although the stock pumping puppets on CNBC would strongly disagree.

But hey, let's try and look at the bright side....Stocks were up 26 points.  Yahoo!!!  Hooray for the robots!

Disclosure:  No new positions taken during the time of publication.


getyourselfconnected said...

yeah I am pretty disgusted. I am going to dust off the trading cap and try and make some limited plays in stuff I can stomach just to pass some time and make a few bucks (hopefully). I got a feeling today this is going to be an 8 month recurring nightmare without end.

Anonymous said...

Once again, the transfer of wealth to wall street as Treasuries & CDs etc. are earning zero, forcing peoples hand to take on more risk and buy equities in search of yield. How is this responsible fed policy? In the meantime Bernake tries to goose the economy and I guess his own portfolio and then take the profits before joe six pack realizes the economy has not really been improving that it has all been smoke-n-mirrors. I think the economy will heal and improve someday, I just think these actions will actually make it harder then had they left well enough alone. Why can't I run my own finances like this???

Jeff said...


Good luck. Brutal market to try ad trade.

There are so many forces moving the markets:

QE money, robots, hedge funds, fear, money managers chasing performance etc.

Your swimming with the sharks. better use a wetsuit filled with armor when you jump in:)

Jeff said...



The savers get screwed while the bank get another $600 billion to gamble with.

The whole thing is disgusting.

The elderly that are being forced to chase yield in order to survive on fixed income are going to see the tide roll out and they will be left with nothing.

I totally agree: If they had just let the market correct naturally we would be in the 8th inning of this by now.

Their constant meddling will probably end up costing us a decade or more.

Let's hope a new Congress exposes the Fed as what they are: A binch of scheming criminals.

FRF.Assoc said...

Good post. What do you think is the best response to the current situation?
Perhaps an account with Dukascopy denominated in CHF and hedged (long the USD/CHF and short the same pair) purely for preservation of capital. Silver?
Do you think hyperinflation is a real possibility, from a run on bonds, for example?

Jeff said...

Thanks FRF

Currencies is a great place to trade given the alternative of robot stocks.

John Paulson is all over the currency trades according to Zero Hedge.

Paulson is the best IMO and his take is trade currencies(he is long Yen) and own gold.

CHF is always a good hold.

I am not well read on currencies but I plan on getting there.

a lot of things with the US dollar haven't made sense until I look at the pathetic alternatives.

The race to the bottom via currencies will be interesting to say the least.

Anonymous said...

DJIA just hit a new post lehman high.

Heres my question, why did the computers take the market to a new high today, and not yesterday when QE2 was announced?

Nothing new happened overnight - did they just plug in new algos this morning?

Either way, its just disgusting.