Wednesday, February 20, 2013

Is The Fed Serious?

The Fed minutes for January were released today and it suggests that the Fed will consider changes to the current QE policy of buying $85 billion of Treasury and mortgage bonds per month.  But does anyone really think this will happen?  Really?

Let's "play the tape" on what would happen.   To begin with, the Fed holds 41% of all 30yr Treasury bonds issued since 2009.  This month, the Fed purchased 75% of the recently issued 30yr Treasury auction.  Assuming the Fed continues buying at least its stated policy of $45 billion in Treasuries every month, and assuming the Treasury will be issuing roughly $100 billion per month (this is actually likely a low-ball estimate based on the annual increase in Federal debt over the past 4 years), the Fed will buying nearly 50% of all new Treasury debt issued. 

Imagine what would happen to interest rates if the Fed were to curtail it's Treasury purchases.   Imagine what it will do to the Government's interest expense if the Fed stops buying Treasuries and the market adjusts to a much higher "natural" interest rate.

How about mortgage paper?  I have written recently about the amount of money being thrown at the housing market by both the Fed and the Government to try and stimulate housing sales.  We're already seeing a significant slow-down in housing market activity based on mortgage application data and non-seasonally adjusted housing data.  If interest rates spike up, the housing market will be decimated.  In fact, the entire economy will fall further into a recessionary abyss.

The minutes also reflected the "view" that the economy was on a moderate growth path.  And yet, based on data that has been released since January, it is obvious that retail and housing sales have - at best - stalled.  In absence of the possibility that the FOMC members are idiots, the only conclusion we draw from the statements in today's released FOMC minutes is that the Fed is playing a dangerous game of political rhetoric.

Let's not forget that the FOMC co-chairman, Janet Yellen, has openly advocated using a negative nominal short term interest rate policy as a mechanism to stimulate employment.  The Fed is painted into a corner.  Unless Bernanke wants to go down as the guy who was at the helm of the Fed when the worst depression in U.S. history hit, I can guarantee that not only will QE continue but that the path of least resistance for QE is to increase its size.


  1. I want to know who buys the treasuries in the Social Security and Medicare Trusts so I can receive the benefits I paid for over a 43 year and continuing career.

  2. They said they wanted to stop QE 3/4 after 2 weeks of starting it, it's a joke, nothing more. The markets are not "real" anymore, that includes gold and silver.

    There is no limit what they are going to do, it's their markets.

    Today was a designed sell off, so obvious to all.

  3. Bank Leumi, Mizrahi Clients Said to Aid U.S. Tax Probe

    The brothers used a Chinese account to keep profits not reported to the U.S., according to court filings.

    A banker at Mizrahi persuaded Sperling to move the money from China to Israel, where it would be kept secret from the U.S. government, according to the plea agreement. The account was set up in the name of an offshore company, and Mizrahi only sent statements to an attorney.

    Sperling began taking back-to-back loans in 2003 through the Los Angeles branch, pledging his Israeli account that grew to $4 million as collateral. He never reported the account on his tax returns, nor did he report the interest earned or file Reports of Foreign Bank and Financial Accounts, known as FBARs.

    Bail Review

    At a bail review hearing for Roth on Jan. 8, 2008, Assistant U.S. Attorney Daniel J. O’Brien said Mizrahi gave clients access to secret accounts through back-to-back loans.

    “This is a product offered by the bank, and the bank is essentially engaged in money laundering operations for a clientele,” O’Brien told U.S. District Judge George Schiavelli.

    All of the sentencing filings for Roth were placed under court seal. Seven people pleaded guilty to conspiring to obstruct the IRS, and three donors admitted to tax evasion. The bank wasn’t charged.

    how many other secrets are there?

  4. Looks more and more like JPM is manipulating the long side to buy back the shorts. Probably means $26 is coming up. Unlikely to be the other commercials in the pit as they are all too frightened to take on the Fed. I would like to think Ted Butler smokes crack and therefore he has dreams about silver wars but he probably doesn't and just works for JPM just like the CTFC.

  5. QE forever + hold the bonds forever.

    "A few participants noted examples of past instances in which
    policy makers had prematurely removed accommodation, with adverse effects on economic growth, employment,and price stability; they also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions. In this regard, a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a re-placement for, asset purchases."

  6. Today Feb 20, gold went death cross. The 50 day moving average crossed the 200 day moving average on the daily chart. Does this mean a deeper correction ? Next stop 1200 or 1100?

  7. U.S. Banks Bigger Than GDP as Accounting Rift Masks Risk

    That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy -- according to data compiled by Bloomberg.

    “Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

    U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

    Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

    U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.

    Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles. The government had to rescue American International Group Inc. with a bailout that ballooned to $182 billion after the insurer couldn’t pay banks on derivatives tied to those bonds.

    Derivatives are financial contracts whose value depends on stocks, bonds, currencies or other securities. Because two parties agree to swap cash or collateral at the end of a pre- determined period, that value also depends on the existence of the counterparty when it’s time to pay.

  8. Dave,
    I am so confused, but here is a take, looking at all the numbers in comparison to 2007 (pre crash) it appears to me the FED wanted to slow down the stock market as well. As Greenspan alluded to Gold is a targeted market to destroy. However, things on the street are still not good, so they are trying to see what effect their demolition was. I think they are successful for now. Slight stock correction to keep it from bubble land, and total demolition on gold, silver and miners. This completeley in their minds destroys this monstorous illogical chatter amongst us anti american and non keynsians like you, and me, and the rest of us. He is the meistro, and I hope his wand breaks off in his little bearded fat belly.

    I hope to god, his wrath, eventually and unequivocally destroys the FED, they are now the enemy to me and many others.

    Dave, thank you though not sure why cause I am up with you and Dan,since 2009, but certainly got my clock cleaned with the pennant break down, though, I am sure it was but another centrally planned event.

    1. I feel your pain. This is a set-up for a very big move higher. Something ugly is coming down the pike at our system. The last time they relentlessly hammered the metals like was late summer 2008. And we know what hit that fall...

    2. Yes the problem is PM stocks died in the fall and from this low AUMN for instance will go back to 57 c's. Clive Maund who I hate is trumpeting the collapse of the PM stocks.

  9. Wait a minute. What if QE morphed into something else? What if they started buying GOLD with their printed money, you know they will never stop printing don't you? Several people including Jim Sinclair are speaking of this.

  10. Is gold in backwardation? Look at the settlement prices of Feb and Mar. Very tight physical markets?

  11. With the nominal fiat "value" of the bulk of my "liquid wealth" getting absolutely tuned lately, I'm surprised at how tranquil I feel about all this.

    I agree Dave, something ugly is just around the bend. Virtually a preordained certainty at this point. I say BRING IT.

    Thanks for all you do Dave, always look forward to new posts.

  12. one part of the "ugly" might be the economic slowdown. Several aspects, First we are in contraction already even though govt spokespeople say we are in a slow recovery. Second, Its looking like its widespread. Third: jobs wil have to be lost. Fourth, corp earnings are facing a headwind if a) revenues are contraction and b) most of the low hanging fruit of corporate spending cuts have been picked.

    This economy has the capacity to really dive (one likely "ugly", and that would take the market with it. And tax receipts.

    Yep-its a simple view but sometimes the KISS method works.

    Re: QE-somewhere along the line Treasury Bonds will come under attack because of creditworthiness-not merely the rates are too low. Domino effect on that-pensions and retirement plans (opens the door for mandatory treasuries in retirement accounts). Remember the 3 trillion in social program trusts.
    What type of valuation hit will those take and they are draining funds from that (remember when they run out of assets-disability 2016, Medicare 2020 and Social Security 2032-and all three run out of asset dates are sooner rather than as stated. so accounting wise its getting looney to think they can value them on a future turnaround back up in valuation.

    the added problem is everything you touch or look at has some sort of severe problem or two going for it. The problems keep compounding.

    But they have to keep the perception of hope otherwise it all falls apart now.

    Other uglies: multiple claims on metals. The mid east, of course the banking system, there are a multitude of potentials.

  13. If talk can move markets then the markets are just talk. Think about it. We live in a Strawberry Fields paradigm where people actually lose their lunch over the perceived value of a paper proxy for true wealth.

    As the dollar loses it's prized "preferred settlement use" and reserve status, look to the rising price of oil and the outflow of official gold in support of dollar use to now begin coming from official political stocks.

    Paper goin' down.

  14. Are any of these mutts serious?

    Friends in Low Places: Where The Real Lobbying Happens

    So on Jan. 25, Mr. Reid's office announced that he had appointed Cathy Koch as chief adviser to the majority leader for tax and economic policy. The news release lists Ms. Koch's admirable and formidable experience in the public sector. "Prior to joining Senator Reid's office," the release says, "Koch served as tax chief at the Senate Finance Committee."

    It's funny, though. The notice left something out. Because immediately before joining Mr. Reid's office, Ms. Koch wasn't in government. She was working for a large corporation.

    Not just any corporation, but quite possibly the most influential company in America, and one that arguably stands to lose the most if there were any serious tax reform that closed corporate loopholes. Ms. Koch arrives at the senator's office by way of General Electric.

    Yes, General Electric, the company that paid almost no taxes in 2010. Just as the tax reform debate is heating up, Mr. Reid has put in place a person who is extraordinarily positioned to torpedo any tax reform that might draw a dollar out of G.E. — and, by extension, any big corporation.

    Omitting her last job from the announcement must have merely been an oversight. By the way, no rules prevent Ms. Koch from meeting with G.E. or working on issues that would affect the company.

  15. Impeccable logic, Dave, that the printing will continue.

    I happily sit tight with my bullion. I think I know what is coming -- and soon -- and it is nothing but great for gold and silver.

    I have seen these rigged moves before. This feels just like the rapid, inexplicable moves up in the stock market in the summer and fall of '08 (PPT is my guess), before my massive short bet against the S&P 500 paid off in October/November '08.


    "Instead of (Nevada) state lawmakers approving property and sales tax increases to fund maintenance projects at Washoe County schools, an amendment is being drafted that would authorize the local school board to enact the measures on its own, legislators said Monday.

    The Assembly Taxation Committee is scheduled to take up Assembly Bill 46 on Tuesday. As written, the measure would require Washoe County commissioners to raise the county sales tax rate by a quarter percentage point and add a nickel to the property tax rate.

    But getting a tax bill through the Legislature requires a two-thirds majority in both the Assembly and Senate. Amending the bill to authorize the school board to raise the taxes, however, would not."

    As we look at what's happening at the Federal Level, we forget that what happens at the State Level can have a terrible impact. Who would want to own a home where your property taxes can go up simply by the school board? And you know that once that power is given, its abused. I used to worked at the University System and it would be scary to give the people in charge there such powers. What if both school system and the state needs to raise taxes? Such taxation will kill what's left of the housing market in Nevada.

  17. When Gold /Silver does go up and the money deflates, how does it all become wealth? You wouldn't trade it in for thousands of more funny money. Or would it translate to alot of extra zeros on your electronic bank statement if you're allowed to deposit? The US would have to make Gold/Silver the new currency where I see the Feds offering some sort of "bonus" to deposit it in a bank vault.

  18. It seems every other day I'm hearing from the MSM about the so called housing recovery and higher home prices. Yesterdays snippet on NPR was courtesy of the National Association of Realtors - probably the last group you would want to believe.
    I recently read an article that the only way they can realistically inflate the housing bubble is to revert back to the good old days of liar loans, minimal down payments etc...

    The U.S. Treasury Department and members of Congress are preparing to move forward with plans to expand government-backed refinancing programs to underwater homeowners whose loans are packaged in private-label securities.” (“U.S. Mortgage Refinancing Push Said to Advance in Congress”, Bloomberg)

    “Private label”? So now the USG is going to guarantee the mortgages the banks concocted in their boilerrooms that didn’t even conform to standards that would allow them to be financed by Fannie and Freddie? That’s what Obama is pushing for? Yeegads! Here’s more from Bloomberg:

    “Senator Jeff Merkley, an Oregon Democrat, is drafting a bill modeled on a proposal he outlined last year to set up a federal trust to purchase or guarantee refinanced mortgages….

    The trust, as described in Merkley’s earlier proposal, would provide relief to borrowers with privately owned loans and probably would be set up under the oversight of an existing housing agency. If Congress doesn’t pass such a measure, the Treasury is drafting a plan to step in to pay for rate modifications for those homeowners.” (Bloomberg)

    What? So if Congress doesn’t approve the bailout, then the Treasury will implement the plan anyway? Is that it? That doesn’t sound very democratic.

    Bloomberg again:

    “Under that option, the government would pay the difference between the new and original interest rates to the owners of the loans for five years. Investors in private-label securities have sometimes objected to mortgage modifications because of concerns their income could be reduced.” (Bloomberg)

    Wait a minute. Shouldn’t the investors or the banks take the haircut instead of taxpayers? After all, whose fault is it that 5 million families have lost their homes to foreclosure since 2007 and 11 million homeowners are presently underwater? Not the taxpayer. Let the responsible parties bear the costs. That’s the way the system is supposed to work, right?

    And Merkley’s proposal is just one two bills now awaiting congressional action. The other is the Boxer-Menendez bill which “promises lenders they won’t be forced to absorb the loss on refinanced loans that default.” (Bloomberg) Great. So, while the Boxer-Menendez bill will not refi loans that are not backed by Fannie Mae and Freddie Mac, (no “private label” loans) it will move (an estimated) one million high-risk mortgages off bank balance sheets and onto the public’s ledger. This is how the free market capitalism works in the US today; all the profits go to Wall Street and all the red ink goes to Main Street.

    Obama doesn’t care if struggling homeowners get a break on their refis or not. It’s all a joke. He’s just helping his bank buddies cut their losses while they set the stage for their next big heist.

  19. DOJ Gives Blackwater a Whitewash On Felony Charges
    Something funny happened in the Eastern District of North Carolina today. Out of the blue in an extremely significant case, and without particular notice to interested observers, much less the public, the criminal case against former Blackwater executives for weapons trafficking, and a myriad of other weapons violations, ended. Poof! Gone with an undeserved and inexplicable sweetheart misdemeanor plea.

    Oh yeah, there was one other mention of note in the release:

    The corporate entity formerly known as Blackwater has entered into a Deferred Prosecution Agreement with the government in which it has agreed to extensive ongoing compliance programs and the payment of approximately 7 million dollars in fines.

    How nice. The Deferred Prosecution Agreement was actually entered into and noticed back in August of last year. It was easy to see the DPA coming, and as much as the US Government relies on Blackwater/Xe/Academi for their security adventures, it was predictable they would be given a DPA (and, hey, DPAs provide lucrative paydays to former DOJ friends who get set up in cushy monitor jobs).

    The DPA was easy to see coming, today’s sweetheart plea was not.No, it happened basically as a covert op on the public and interested legal community. Did you notice the bolded date in the DOJ press release? DOJ states the plea was entered on February 14, 2013. What is interesting is that it was not placed on the official court docket until today – at the same time Judge Louise Flanagan, a conservative Bush appointee, was accepting the plea and sentencing Jackson and Matthews, thus ending the case. All designed so the public would not know and could not have any input. Diametrically contrary to the fundamental precepts of the American justice system.

    How little of a wrist slap is the sentence? I’ve had common DWI clients sentenced to more. Compare and contrast to the punishment the DOJ sought to impose on Aaron Swartz.