FED TO BUY $300 BILLION OF TREASURIES - QUANTITATIVE EASING ALERT!

[Sam Spade]

We are so ****ed now (not particularly at this moment, I should note).  Which bad scenario should I place on the table now...  (ugh)

http://www.marketwatch.com/news/story/Fed-buy-Treasurys-latest-bid/story.aspx?guid={8C08C8DB-1945-4A8A-A047-C3782DE43911}

Dollar just collapsed.  10yr/30yr treasuries skyrocketed through the roof and so did the stock market, even though the stock market is pulling back.

EDIT:  Missed one - gold skyrocketed too (not surprisingly).

[Sam Spade]

So are there any upsides to the dollar collapsing? Maybe more manufacturing?

There are no positives results to this scenario.  Period.

[Sam Spade]

More complete article...

http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14680377.html

The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion.

[Sam Spade]

Opebo and Jmfcst agreeing on economics, cats and dogs living together...MASS HYSTERIA

Actually, it tells me something as well...

EDIT:  Well, it tells me that ( to myself), but it tells me something more important - wait patiently and prepare.

[Sam Spade]

Opebo and Jmfcst agreeing on economics, cats and dogs living together...MASS HYSTERIA

Actually, it tells me something as well...

EDIT:  Well, it tells me that ( to myself), but it tells me something more important - wait patiently and prepare.

look...though you and opebo have totally different economic viewpoints, both of your viewpoints never change, regardless of market conditions.  Both of you are willing to play chicken with icebergs.  I, on the other hand, am willing to temporarily change course in order to save the ship.

This ain't saving the ship, jmcfst.  This is purposely driving a hole in the ship and every lifeboat, along with throwing all the life jackets overboard.  It won't sink overnight of course, and right now it looks like you're saving the ship (or something like that - I don't have a good analogy at the moment).

If you view me as being stubborn or unchangeable, so be it.  History has shown time and time again that the only way out of a debt-deflation is to default the bad debt.  Opebo's solution gives us Weimar, Argentina and Zimbabwe (as examples); continued borrowing of debt (no monetization) with no end gives us Iceland; I don't think we're lucky enough to get Japan for a whole host of reasons.  If I am wrong, long-term, I'll take my lumps.  Anyway, we disagree on the solution, not the problem.

There's a good reason why symbolically, if you read Bernanke's thesis, this is presented as his last option to stopping a debt-deflation.  Of course, that also tells me that we're much, much worse off than TPTB are letting on.

I have a few working theories as to why it was done - 1) the need for buyers of the massive amounts of debt that's going to be done this year; 2) the need to keep interest rates lowered when that debt is being issued (as the 10-year bond was at 3% yesterday, and technically would have bounced much higher soon); 3) the need to keep interest rates lowered when certain commercial paper obligations roll over (otherwise they would have blown up); 4) some other general problem that was going to blow up if we didn't do anything.

Look - with today's announcement the Fed will own, according to my count, about 40% of the MBS out there.  When will the Fed own that much in Treasuries?

I said that there would be one last flight to safety in bonds.  I thought it would because of some failure in the EU and UK.  This is it - the final bubble is being created - the "government finance" bubble.  The only way the Fed will have to keep this bubble going now is to keep buying Treasuries.  Otherwise, it pops or it ends when the Fed owns all.

Oh, and the EU and UK still have it worse than we do (for now).

[Sam Spade]

If you view me as being stubborn or unchangeable, so be it.  History has shown time and time again that the only way out of a debt-deflation is to default the bad debt. 

I don't consider the Great Depression of the 1930's as a "way out".

In any case, check out this video about the short squeeze on Citi's stock conversion:

http://online.wsj.com/article/SB123739700104873325.html#articleTabs%3Dvideo

I noticed this morning that they were calling in shares used to short financials today.  Perfect timing really - to coincide with this big FOMC announcement.  Congrats on the hold (through today at least)

In the GD, we used the same mechanisms that we're using today, just not in such great amount.  In fact, the 1931 bond market dislocation occurred in part because people thought we were going to monetize our debt. 

Of course, every scenario is not the same, but to me the idea that doing more of the same, just in larger amounts, will work, is well, just, you know...

We shall see.  I hope I'm wrong, but I've been saying that for a while now. 

Anyway, I wish you luck, nonetheless, even though I know we'll disagree.  I haven't played around in the stock market since June 2007 (I don't like playing in bear markets) and I don't play day trader.  My curiosity in and study of the markets is mainly intellectual (personal disclosure)

[Sam Spade]

In the GD, we used the same mechanisms that we're using today, just not in such great amount. 

huh?!  How can you say that?   The Hoover administration did next to nothing from Oct 1929 to early 1933 - Hoover believed the market would sort it all out.  The market did sort it all out - and the vast majority of Americans were huge losers.

You believe that?  Seriously?  Well, it's no wonder we disagree on the solution when we don't agree on the history.

I'd advise you to go and read up some books on GD1 and then we can talk.

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So how come everything that's been done so far in his "thesis" has failed?  I don't see things getting better, rather I see things slightly less bad than they would have been otherwise BUT with none of the underlying problems fixed. 

At some point, I submit that the underlying problems will be fixed through the "flush" that would have happened before.  Moreover, the "flush" will be much worse than it would have been in the past.  Anyway, I believe our question here is "when", not "whether".  I do think that the "flush" can be mitigated *a bit* through government regulation and re-regulation (it's a question of *what* not *how much*) and punishment of the fraudsters.

I would also submit that BB's thesis "fails" because you can't solve a "debt-deflation" with more "debt".  QE is just the last step in the game.

As before, I hope not to be right, but I'm not going to bet against myself. 

[Sam Spade]

Sam,

Were you in agreement of the original $700B "bailout" last Sept-Oct? 

No - once I realized who the beneficiaries were going to be.

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Instant depression then, worse and longer one now...  Perhaps even complete economic collapse.

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Government could have intervened to deleverage in much more useful ways than just pumping money into banks and now deadbeat homeowners, lenders and loan servicers.

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Government has its place in the markets.  Fundamentally, that role is to regulate the markets so that fraudsters cannot function and if they do function, that they are punished when found out.  (in other words, provide the rules and punish those who flaunt them).

When private entities make bad bets, government's role is not to paper over the losses.  Rather, it is to ensure the pieces are broken up properly (that's why we have a Bankruptcy Code) and sold to the highest bidder. 

More importantly, it should ensure that those entities who have made good bets are protected from the destruction AND that those who depend on the private market for the livelihood (i.e. the masses) are protected, no matter how bad things get.

Tell me exactly, how any actions made in the past two years of this mess have been made according to the principles above?  Seems like to me that the past two years have been devoted to doing everything exactly the opposite of this.  In fact, one may argue legitimately that everything has been done wrong in this sense since the Mexico debt crisis of 1995.

Food for thought.

[Sam Spade]

The purchase starts tomorrow. 

http://www.newyorkfed.org/newsevents/news/markets/2009/ma090324.html

Yields on the 10-year note had already regained half of what they had lost since the QE announcement and 30-year bonds were all the way back to where they were.

So, well put two and two together....

Yields did fall again after this announcement but nowhere near as much as before.