FED Reaction from Around the Web

Another day, another dollar or so they say.

FED Reaction from Around the Web
I ran across many excellent one liners or short snippets that were insightful and/or funny regarding the FED decision to buy more treasuries with money they make on MBS assets they bought with treasuries. I know that sounds weird, but this is what passes for monetary policy.

My own take on the FED move today is that they are now deeply enmeshed with Wall Street. As I wrote last night, unable to influence the real economy the FED will now make sure Wall Street is getting all they need to keep the indices up. Absent that outlier (a higher stock market) there has been no real improvement in the economy in a long time. Everyone on the street knows it, and I think the FED does as well. There does seem to be a little gamesmanship going on here though; the FED does not want to keep doing these things and would prefer CONgress do something while the CONgress is scared to death of the November elections and would prefer the FED to do all the work! Classic indeed.

On to the rip offs!

The Housing Time Bomb noted a crazy day for the 30 year bond and closed with:

Expect some serious unintended consequences from today's policy shift. We already saw one today with the move in the 30 year.
Folks, you need to seriously ask yourself why the Fed decided to pile into treasuries when rates are at all time lows. I mean what is the point? It's not as if this is going to push rates much lower.

Short term treasuries are about as crowded a trade right now that I have ever seen.

Keeping things short and sweet, The Reformed Broker offers:

So the Fed Groundhog came out of his hole at 2:15 pm today, sniffed the air, took a glance at the data and decided that there will be 6 more months of kitchen-sink policy. He certainly signaled a continuation of economic winter.

You knew Paul Krugman was going to be unhappy unless a 5 trillion dollar program was announced, and he does not disappoint:

Roughly speaking, it has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same. Whoopee.

Does that make this a whoopee cushion move Paul?

The Golden Truth wonders:

The FOMC announced today that the Fed will be buying more Treasury debt to help support the economy. Can someone please explain to me how enabling the Government to borrow even more more money actually supports the economy?

Sorry, I cannot help with the answer!

This Yahoo Finance piece was full of fun lines:

"I don't think they are going to raise interest rates until it is very clear that unemployment is moving definitively lower and that doesn't look likely until late 2011," said Mark Zandi, chief economist at Moody's Analytics.

But was it not Zandi that wrote the paper "How the FED/Treasury Saved the World"? I am thinking of a term for this guy that I have not heard in a long time...give me a minute...it is.....POSER!

"The Fed talked loudly but carried a small stick," said Joel Naroff, president of Naroff Economic Advisors.

Another one ultra long SPY going into the meeting. Poor guy.

"The news is positive but not meaningful," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston. "The money is a pittance."

You are welcome!

The NY Times header reads:
Fed to Buy U.S. Debt, Saying Recovery Has Slowed
This time it's different!

While not related to today's action, Kid Dynamite notes a Ben Bernnake quote from earlier:

"Unlike the federal government, every state except Vermont is required to balance its budget, forcing spending cuts, tax increases or both -- actions Federal Reserve Chairman Ben Bernanke said last week are contributing to the nation’s sluggish recovery."
Translation: Our inability to spend beyond our means is hurting our "recovery."

All you need to know in one sentence.

Have a good night.

Will Lower Long Term Rates do Anything for Anyone?

Another Monday in the books. Hard to believe that August is already a week old. The summer is getting away! Today is the funky sequential 08-09-10 date as well for whatever that is worth.

Will Lower Long Term Rates do Anything for Anyone?
I have not pulled up a Yahoo Finance article in a while, so I am going to take a look at one tonight.

As recovery loses speed, Fed mulls ways to help
Right off the bat I have to ask, didn't the Treasury Secretary just pen an article welcoming us to the recovery? Things move fast I guess as the recovery is NOW losing speed. Amazing.

Every one's attention is turned to the FED meeting tomorrow. Wall Street and the banks are licking their chops at an extension of easy money and maybe even more help making record profits.

From the article:

WASHINGTON (AP) -- Federal Reserve policymakers are in a bind: they want to say and do things that will energize the economy, but in doing so they risk making things worse by sending signals that the recovery is in really bad shape.

I always love this logic; if the FED says "boo" everyone will panic, but if the FED says nothing everyone will panic. I wonder if business at this point is taking their cues from the FED as to how the economy is doing. More:

Economists say Fed officials have a handful of options at their disposal, but would likely consider two options for perking up the economy:

-- Clarify that the Fed will keep short-term interest rates at record lows for as long as it takes to encourage more use of credit.
-- Use the proceeds from the Fed's investments in mortgage securities to buy government debt on a small scale. That could help drive down long-term interest rates.
Both steps would signal to markets that money could be borrowed cheaply for a longer period of time, giving businesses and individuals more confidence to finance major purchases. Still, economists doubt how much practical impact they would have. Interest rates are already at historic lows and that hasn't generated more buying activity.

A bolder step would be to restart programs undertaken during the financial crisis that involved large-scale purchasing of mortgage-backed securities and government debt.

The aggressive action has the potential to spur growth by driving down interest rates even more, but it comes with considerable risk. It could rattle investors about the health of the economy and lead to a sell-off on Wall Street. Panicked financial markets could prompt businesses and consumers to retreat further. That could push the country back into recession.

This is a jumbled mess. The key point is that low rates have accomplished nothing tangible in the real economy and even lower rates will not do anything either. Why bother then? You would have to ask the FED. Going on:

"Such a move is unconventional, and no one knows if it will work," said Chris Rupkey, economist at the Bank of Tokyo-Mitsubishi. If Fed policymakers' take such action, "they risk their credibility," he said.

Um, this guy works for a big Japan bank and he is not sure IF QE will work? Here's a hint buddy, look around Japan and get back to me. Final snippet:

That means rates on certain credit cards, home equity loans, some adjustable rate mortgages and other consumer loans will stay low. Commercial banks' prime lending rate would stay at about 3.25 percent, the lowest point in decades.

The Fed also could bolster its policy statement, echoing Bernanke's promise to lawmakers last month that the Fed is "prepared to take further policy actions as needed," said Michael Feroli, economist at JPMorgan Chase Bank.

We have had almost 2 years of free money and no one is running over their mother to grab any of it. The law of diminishing returns comes into play here. If you could borrow at 5% instead of 10% that is something. Borrowing at 3.2% instead of 3.5% is really not going to get anybody too excited. How's that ultra low rates being a structural part of the US economy working for you? I told you this would happen.

When I go fishing at the Quabbin Reservoir there is a point in the day when I cross over to the other side of the lake. To do that I pass between two large islands (Mount Zion and Mount L). This section of the reservoir is the deepest part that I go through. The depth finder will read up to 140 feet deep at this point. Now there is no real difference between driving a boat over 20 feet of water or 140, but I have to tell you I always feel a bit scared knowing I am passing over water that deep in a little aluminum boat! Is there a point to this story? I think so.

For all the cracking I do on the FED, they are not dumb people. They know full well that these little games with rates are not going to do jack crap. The only benefit to such a thing is more liquidity for banks to continue to hunker down with and trade crap back and forth to each other. The FED has chosen to have a stock market assets "recovery" rather than no recovery at all. This of course will further make the financial sector the biggest engine of the US economy, which stinks because it benefits very few. Instead of reigning in the banking sector which blew itself and the country up, the policy has been to make sure they get even bigger. Puzzling I know.

My above boat analogy fits here because the FED is going over deep water right now and they are doing it by their own accord. They got in bed with the banks and now will have to answer Wall Street calls for more easing, programs, bailouts, etc. If they do not, the only recovery anyone can point to will be gone in about 1 weeks trading time (well maybe 2, due to the new limit down rules). It must be an uneasy feeling.

Have a good night.

Germany Lowers the Boom on Being Naked

I have no idea where the time has been going but I am late again. Huge rainstorm coming tonight, maybe 2 inches of rain. Spring time indeed.

All Time Low Rates for All Time?
A point I have hammered home many times is the total reliance on all time low rates for the economy to even function these days. By now you are well aware of the hazards of zero rates, and it seems a few others are voicing some concern:
Michale Pento on Prudent Bear:
U.S. Solvency Contingent on Low Interest Rates
I would not agree 100% with everything in the piece but he does cover the important ground. Snippet:

The United States is the largest debtor nation in history. Our continued solvency depends upon low interest rates. But low rates are engendered either naturally from increased savings or artificially from money printing. Without having the adequate savings to bring down rates, the Fed has supplanted savings with monetization of debt. However, money printing eventually leads to intractable inflation and will send bond yields much higher, especially on the long end of the curve.

A risk aversion mindset or a flight to quality (stop laughing) cannot account for the ultra low bond yields in the face of the kinds of deficits the US is running and projected to run. I think that forces are at work to keep yields low. I would say this is going to change, but I thought that a year ago. V shaped recovery and a 3% 10 year bond. Sounds about right.

For more on this topic:
Greek Crisis Is Latest Excuse for Fed’s 0% Rate: Caroline Baum

Foreclosure Numbers are Getting Better, NOT!
You have to check out the foreclosure maps over at Housing Doom today for the Phoenix Metro area. My first thought was that this could not be correct but I am almost sure it is. See the maps here. The names of the towns are El Mirage and Surprise. How fitting.

Germany Lowers the Boom on Being Naked
Yes, I did have that title in mind all day, HA!

In a move that was quite out of left field, Germany has now prohibited naked short selling of various instruments until March 31, 2011 or forever whichever comes first. Included are:
-Sovereign government debt
-Credit default swaps involving eurozone debt
-10 Institutions in the banking industry. A run down is on Clusterstock. About half are insurance or re-insurance firms

Karl Denninger had this take:

It appears that the German Government has just plain had enough of the crap that the banksters have tried to pull, and has decided to do what Barack Obama should have done in early 2009.
That is:
•No more naked credit crap, especially against sovereigns but not only against sovereigns. No insurable interest, no CDS - period.
•Naked shorting will now be actually stopped in 10 leading financial institutions.
•Germany has had it with naked shorting of Gold, and specifically noted bank manipulation of gold prices via naked shorts beyond intent or ability to deliver.
•Germany has also said that they're not going to permit Euro derivatives that are not a "bonafide" FX hedge. That is, no more naked bets on Euro movements either.
•Hedge funds are going to be regulated, position size limits mandated and enforced, reporting enhanced and a transaction tax is coming.
It's about damn time.

Oh, and it appears that instead of telling all the banksters what they were going to do and "getting permission" first, or even discussing it with other governments, the German Government did what all governments should do - make up your mind and then do it without giving a good damn whether the banksters or other governments like it - and without giving them input into the decision or notice that it's coming.

The details are available on the web so I will not run down all that again.

What is interesting here is that nothing happens in a vacuum. What would be the reason Germany felt this action was needed and on so little notice? There was no way these kinds of positions could have been closed out during market hours. What's the deal?

I wish I knew. I imagine we will have a better idea by the weekend. Until then, I will speculate because it is so much fun! Reasons for this event could be:
-Germany was aware of a new and very large influx of naked shorts on debt instruments and worried about a panic run. They were convinced the threat was real enough to pull the trigger in a hurry. If this is true the details should be coming out very soon.
-This was a temper tantrum by Germany and Merkel in particular after being dragged into a huge Greece bailout and overall Eurozone bailout package.
-This was an angry response to the clear usage of Quantitative Easing by the ECB.

I suggest you leave other ideas in the comments section.

Overall I would say I am in favor of banning this kind of trading. It is one shade shy of outright fraud and is yet another from of leverage. Still, markets hate "uncertainty" and this opens up some serious cans of worms not limited to enforcement issues as well as intermarket crossover questions. Again I think the "why" is more important than the "what" here. I imagine I will be coming back to this!

Not to be out done, the SEC opened up some new rules for US markets as well:

SEC proposes new trading rules
Major exchanges to impose stock 'circuit breakers' to prevent plunges under new SEC rules
The rules would take effect in mid-June under a six-month pilot program agreed to by major U.S. exchanges and the Securities and Exchange Commission. The SEC announced them and put them forward for public comment, in a response to the stunning plunge of May 6.
Under the plan, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more -- within a five-minute span -- would be halted for five minutes. These rules, known as "circuit breakers," would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That's almost the entire trading day.
Importantly, the new circuit breakers would apply to all U.S. exchanges. Most of the 50 or so U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.

I am a little surprised they allowed this to be applied on the way UP as well as DOWN when it is clear the DOWN is all that matters. It will be funny to see some daytrader freaking out when his stock keeps getting halted all day on one of our rally days, usually Monday's right at the open. "Dudes, you are killing my MOMO model with this crap!". Too funny.

And again, while this seems harmless there is no way to know just how this is going to work out.

Why don't they all just quit fooling around and just makes stocks unable to cross below where they are on today's date? That way you can weed out any "outlier" prices not tied to solid fundamentals. I always thought that kind of thinking was a joke, but we get closer everyday. What a mess.

Added:
If you think I am sarcastic, wait until you get a read on Tom of the North's newest entry at The Looming Doom:

Superhyperinflation Just Around The Corner
The Looming Doom has learned leading experts are advising the Obama Administration that the U.S. is poised to experience the most painful economic cycle of all: the Super-Hyper-Inflation Trauma (SHIT). While there is yet slight division amongst the experts as to whether the U.S. is already in SHIT or not, once the U.S. is fully in deep SHIT, there is no quick fix. Furthermore, if the SHIT is too deep, the economy may never recover.

The rest just gets better.

Have a good night.