The Fed faces a serious dilemma from summer 2011: an absolute necessity for QE3, an impossible QE3

[CrackSmokeRepublican]

The Fed faces a serious dilemma from summer 2011: an absolute necessity for QE3, an absolute impossibility of QE3

- Excerpt GEAB N°53 (March 16, 2011) -


The Fed faces a serious dilemma from summer 2011: an absolute necessity for QE3, an absolute impossibility of QE3
As noted previously, with the Quantitative Easing 2, against a background of growing distrust vis-à-vis the Dollar and the US economy, the Fed has become virtually the only buyer of US Treasury Bonds. Officially it is already buying 70% of new issues. The use of "undercover agents", via the City of London and offshore financial centres, more than likely brings this share above 90%. But the actual share of Treasury Bonds purchased by the Fed is not so important in itself because, according to LEAP/E2020 (1), it's been purchasing the majority of new US debt issues for years through its "primary dealers" and the numerous exotic channels offered by the financial world. What is important with the announcement of Quantitative Easing Policy since 2009 is the "unveiling" of a previously hidden reality... because it could be hidden.

Confidence in the US economy allowed the Fed to carry out "its little deals" with reality while no one cared or even (for most operators) imagined that such practices had been the norm for many years. The economy being, in the main, a matter of collective psychology, the importance now is that most players know that there is no one other than the Fed to purchase US Treasury Bonds.

The Japanese disaster greatly enhances this awareness because it will be impossible to convince anyone that Japan will continue buying US debt at a time when it must marshal all its financial resources to save the country. Therefore, the Fed arrives at the end of the "road to nowhere" otherwise to a financial disaster (2). In fact, in three months, when QE2 officially ends, it must both lie and tell the truth on the same subject: claim that QE2 has worked, that the U.S. economy has relaunched and that it therefore no longer needs to buy US Treasury Bonds, and simultaneously continue to buy 90% of these same Treasury Bonds since it is the only buyer in the market.

Yet in three years the psychology of financial markets has changed dramatically regarding sovereign debt in general and US debt in particular: the operators will carefully scrutinize the flow and draw their conclusions, as PIMCO has just done already by selling its Treasury Bond holdings.

The Fed faces a serious dilemma from summer 2011: an absolute necessity for QE3, an absolute impossibility of QE3
Let's summarize the situation in summer 2011 for US debt markets:

. Munis (local authority debt) will continue to deteriorate to literally melt down at the start of the new US fiscal year (which starts in July) (4)
. private operators (like PIMCO) are selling, or at least, not buying US debt any more
. Japan (the third largest holder of US Federal debt after the Fed and China) will have to sell its T-Bonds to finance its reconstruction (5)
. Euroland is quietly making its exit from Anglo-Saxon financial markets (6) (with, as expected, a Euroland summit on March 11 which confirmed the continuation of its financial stability fund (7) and the assertion of Euroland control ( on general EU progress (9)) and will thereby further reduce its stock of US debt (10)
. China no longer wishes to increase its huge stock of US Federal debt
. the Gulf oil states, led by Saudi Arabia, whose regimes are struggling to survive and who no longer believe in US protection, now have other priorities than to support the US Treasury Bond market (and they may even make it a weapon against Israel and Washington (11)).

Finally, to top it all, the US economy continues to sink into "double-dip-flation". No one now believes US unemployment data, supposed to show an improvement in the labour market. Even the "mainstream" US media now condemns the unreal nature of the statistics in question. CNBC headline on 14/02/2011 was even "Why the unemployment rate has become a bad joke" (12). Property prices continue to collapse. The trade deficit has swollen again (13). And actual inflation (in the price of goods actually consumed by people) is rising sharply. The least one can say is that this is a picture (14) that really is not conducive to "invest" in the debt of such an economy. And we remember that the rest of the world, having already rallied strongly to criticize the launch of QE2, just like, for that matter, a significant number of US policymakers (see GEAB N° 49, internal and external opposition to QE3 will extremely powerful.

Three US unemployment rates: two official (U-3 in red and U-6 in grey, and SGS alternate in blue (calculated according to official methodology of the 1990s) - Source: SGS, 04/02/2011
Three US unemployment rates: two official (U-3 in red and U-6 in grey, and SGS alternate in blue (calculated according to official methodology of the 1990s) - Source: SGS, 04/02/2011
Still, between the absolute need for QE3 and the absolute impossibility of QE3, reality will not be content with vacuum; something must happen in the second half of 2011 (15)! Our team is convinced that it's the moment when the dominant view of recent years that no major holder of US Treasury Bonds has an interest in selling them for fear of devaluing its own stock of US debt will run up against the principle of reality. Japan in its disastrous situation probably constitutes a "principle of reality" even more powerful than that of the Arab regimes of the Gulf that we have already identified in the previous GEAB issue.

In any event, "two principles of reality" pushing in the same direction (16) at a moment of historic weakness of the US economy, of the Fed and the US debt market, in our opinion represent the certainty of a sudden meltdown in the US debt bubble in the second half of 2011 (17).

We explained last January that 2011 would be the worst year since 2006, the year of the beginning of our anticipation work on the global systemic crisis, mainly because the international system is in such a state of weakness and decay that any major shock could sweep it away in a new turmoil. The US debt market is in the course of reaching this stage and, of course, the US Dollar as well.

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Notes:

(1) See the 2006 and 2007 GEAB issues on this subject

(2) February 2011 was the biggest ever monthly Federal deficit ever recorded at 223 billion USD. Source: Zerohedge, 03/07/2011

(3) Entitlement spending includes social spending such as Medicaid, Medicare, Social Security. This scenario takes for granted in particular a sustainable economic recovery in the US.

(4) 44 States are facing cumulative deficits of more than 100 billion USD in 2012. Source: CBPP, 03/09/2011

(5) This option is beginning to be clearly seen in the US. Source: Los Angeles Times, 03/14/2011

(6) In this respect, the attitude of the three major Anglo-Saxon rating agencies is becoming a real travesty: downgrading Spain on the eve of the Euroland summit, refusing to touch Japan's rating (in complete economic and financial chaos), but downgrading Portugal (for no other reason than a feeling over the country's budgetary efforts). For that matter, market participants seem to have drawn the necessary consequences: the Euro didn't even move one inch after the rating agency announcements. For our team, rather like the Financial Times a year ago with its manipulation around the Euro, these agencies have definitely lost all professional credibility to be nothing more than auxiliaries of Anglo-Saxon financial markets in full collapse. They will soon realize that nobody listens to them, which offers a vast market to new rating agencies wishing to work objectively ... a booming market for long term investors.

(7) As explained in previous GEABs, in acquiring its own financial infrastructure (funds, rules, procedures ...), the Euroland countries have very sharply reduced their dependence on external financial markets.

( Read the interesting article on this subject in Corriere della Serra which illustrates the younger generations' massive support for Euroland and the Euro, without any nostalgia for Marks, Francs, Lira or Pesetas. Source : Presseurop, 03/04/2011

(9) Sources: Yahoonews, 03/15/2011; Deutsche Welle, 03/12/2011

(10) Euroland will in fact focus on the purchase of its own debt! And we will not even dwell on the total divergence of the perspective on interest rates between the ECB and the Fed. Source: CNBC, 03/03/2011

(11) See GEAB N°52

(12) Far from falling to 8.9%, the unemployment rate is above 20%. See chart above and the very interesting ShadowStats website. Moreover, it is helpful to read the article by Richard Benson, published in Safehaven of 16/02/2011, which very clearly explains the collapse of the US workforce. In addition, evidence of the unreality of official statistics, the Fed requires US banks to prepare for a stress-test including an official unemployment rate of 11% for first quarter of 2012 (who, according to LEAP/E2020 should place the real rate at 25%).Source : Zerohedge, 17/02/2011

(13) Source : CNBC, 10/03/2011

(14) We encourage you to browse the excellent report by Mary Meeker, entitled USA Inc., which presents the fundamentals of the US economy as a financial report on a business. If the Federal debt is a share of USA Inc.., in other words investors will tend to sell rather than buy.Source : KPCB, 02/2011

(15) Ben Bernanke must face up to the impossibility that he himself has helped to create. Source : Financial Sense, 03/03/2011

(16) Source: Bloomberg, 03/16/2011

(17) Under the Obama administration the Federal debt has increased by 3.5 trillion USD. Source: CBS, 02/23/2011

Mercredi 3 Août 2011



In the same category:
Transatlantic Conference - " Which Transatlantic Relationship After the Global Crisis? " October 3-4, 2011 in Houston (Texas, USA) - 04/08/2011
Reminder - Open letter / London G20 Summit: Last chance before global geopolitical dislocation - 03/08/2011
The decade from 2020 to 2030: Welcome to the World Afterwards... the babyboomers ! by Franck Biancheri - 11/07/2011
MAP3-July2011 - Contents - 11/07/2011
GEAB N°56-Special Summer 2011 is available! Global systemic crisis – Last warning before the Autumn 2011 shock, when $15 trillion of financial assets go up in smoke - 16/06/2011
The first half of the decade marked primarily by world geopolitical dislocation - 05/02/2011
GEAB wrote it in June 2008: "Arab world: Pro-Western regimes go adrift / 60 percent risk of socio-political explosion on Egypt-Morocco axis" - 31/01/2011
Book - 'World crisis: The Path to the World Afterwards Europe and the World in the decade from 2010 to 2020', by Franck Biancheri - 27/12/2010
Do GEAB yourself with the 'Manual of political anticipation'! - 12/11/2010
For 100 euros, have access to 4 years of GEAB archives! - 26/03/2010
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http://www.leap2020.eu/The-Fed-faces-a- ... a7223.html

[CrackSmokeRepublican]

Don't Fight Bet On The Fed

August 5, 2011     (Mobile version)


The era of quasi-religious belief in "Don't fight the Fed" is drawing to a close; the Fed has been revealed as significantly less omnipotent and powerful than previously imagined.

Many observers expect the Federal Reserve to bail out the stock market next Tuesday with an announcement of QE3, another round of "monetary easing" to reinstall the trade in risk assets. If they do, it will fail. The basic reason it will fail is that the Fed's credibility has fallen below a critical threshold. Put another way, the quasi-religious trust in the Fed's infallibility and power to single-handedly reverse global markets has been eroded by reality: QE2 was a monumental failure.

Here's a couple of things to understand about the Fed before you "buy the bounce when they announce QE3."

1. Though nominally independent, the Fed is a political construct. The idea that public opinion and political support have no influence on the Fed is wrong; the Fed's failure to revive the economy while squandering trillions of dollars propping up banks and Wall Street bonuses was not lost on the political class. Though nobody's talking about it, the Fed's abject failure to revive the real economy has greatly diminished its political range of maneuver.

Rumor has it that the word has already gone out to the Fed not to intervene with additional trillions to prop up Europe.

2. The consensus view is the Fed has either engineered the stock market drop to give it a free hand with QE3, or it will be "forced to do something" to combat the implosion of its pet fix to the broken economy, the "wealth effect" of rising stocks.

What these views miss is the Fed is now in a no-win endgame where its best move is to minimize the damage to what's left of its own reputation and credibility. The worst move here would be to double-down on QE3, because if it failed to goose global markets in a sustained fashion, then the Fed's remaining credibility and "magic" would vanish in a puff of smoke.

Chairman Ben Bernanke telegraphed this in his recent testimony to Congress, in which he basically stated that the Fed had done all it could and there was little more it could do other than wave a dead chicken and chant a few old incantations. Though he dutifully repeated the standard reassurances, i.e. "There is always more monetary easing we can do," he was careful to lower expectations that such easing would accomplish anything.

His testimony was that of someone setting up CYA in a major way. (CYA = cover your behind from recrimination when things head south.)

3. The Fed's power rests not in the fabled printing press but in the invisible coin of trust. Now that its fallibility has been exposed, its power, i.e. the magical faith in the guaranteed efficacy of its actions, has been destroyed.

This cloak of invincibility is what generated its power, and now that its grand policy of rescuing the economy via monetary easing and "the wealth effect" have collapsed into smoking ruins, that cloak has been shredded.

The folks running the Fed are not stupid, though they may be profoundly misguided. If they announce a vast QE2-type "easing," they would be taking on a potentially fatal risk, as the entire blame for the coming debacle would fall squarely on the Fed. They know a QE2-type easing will fail, because they have undeniable evidence that QE2 failed.

In other words: since they know QE3 cannot revive the economy or the market, then why on earth would they bet the farm pursuing a policy that's doomed to fail? That would be a form of institutional suicide.

While doing nothing would expose them to political heat from politicos desperate to revive the economy by any means, the Fed is not about to step in front of the train just to satisfy inept congresspeople.

What is the least-risky course of action for the Fed? Announce some wimpy half-measures to dodge the accusation of doing nothing, but also avoid any grand QE3 measures which would shift the blame for the coming meltdown on the Fed.

The Fed is backed into a corner of the board where all the endgame choices are unsavory. The Fed squandered all its pawns, rooks and bishops in 2008, 2009 and 2010. Its political capital has been expended pursuing policies that failed to fix the financial causes of the 2008 meltdown and also failed to revive the Main Street economy. As of yesterday, the "wealth effect" created by a rising stock market has been gutted.

The Fed is on the defensive. When you're playing defense, trying to protect your King and Queen with a single Knight, the Grand Strategy is no longer an option.

4. The limits of monetary policy are now clear for all to see. Even if the Fed announced a $1 trillion buyback of Treasury bonds, the market would go through the motions of a dead-cat bounce, but the faith in the efficacy of that policy has been lost. Neither the political class nor the market believe such a policy will accomplish anything.

In other words, QE3 is dead on arrival. If the Fed announces a massive "surprise" campaign of easing, it will be accepting the entire responsibility for the revival of the U.S. economy and the stock markets. Since we all know any such Grand Gesture will fail, then the Fed would be committing institutional suicide.

5. The Fed's easing does not push money into the economy. Thus is will necessarily fail.

6. The "risk trade" is on the order of $30 trillion. Printing $500 billion and shoveling it into the risk trade over six months is not going to offset the losses from this week, never mind the potential losses over the next six months.

Add all this up and the inescapable conclusion is that the Fed will duck for cover. Maybe the market rallies for a few days, back up to the 200-day moving average in a classic oversold retrace, but the technical weakness outlined in Remind Us Again Why Anyone Should Own Stocks For the Next Two Years (August 3, 2011) cannot be resolved by QE3 for the reasons noted above.

Here is a simple chart of the S&P 500, the SPX. The SPX sits on 1,200, a line in the sand going back to the days in 2008 just before the waterfall collapse in global markets. Note how the SPX bounced off 1,200 back then; perhaps history will echo as the Fed's soothing half-measures will spark a relief rally of sorts.

But then gravity takes hold and reality sets in.

As noted earlier this week: since the U.S. dollar and the SPX have been on a see-saw for years, it's interesting to compare the DXY's recent decline with its action back in the summer of 2008, just before the global financial Ponzi scheme imploded.

The Fed bet the farm last August on QE2, and it lost. It no longer has the political capital or market credibility to make that sized bet again. It is on the defensive, and in survival mode. Big bets and grand gestures have no place in this endgame.

You might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.


NOTE OF THANKS: Thank you to everyone who wrote positive, encouraging emails recently--I have read and savored every one. Due to the press of events and workload, I am unable to respond at this time. To those I owe books to: please be patient, I hope to have worked through my backlog by next week.

Thank you to everyone who emailed me in the past week; while I read every email, at this point correspondence is like the incoming tide and my little sandcastle of time and energy has been completely swept away. Thank you for your understanding that I am just one standard-issue individual with extremely limited time to spend on the site.
http://www.oftwominds.com/blogaug11/don ... -8-11.html

[CrackSmokeRepublican]

Looks like a huge chunk of Talmudic J.S. is hitting the fan this weekend. Batten down.

Jew'Bama (Inner-City Mayor writ large)  and Jew'Congress-Puppets have finally breached the wall...  -- CSR

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S&P Downgrades US To AA+, Outlook Negative

Submitted by Tyler Durden on 08/05/2011 - 20:27


Well, so much for the conspiracies. S&P has just released a scathing critique of the total chaos that this country's government has become. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective,  and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability." What to expect on Monday: " it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021." And why all those who have said the downgrade will have no impact on markets will be tested as soon as Monday: "On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors." Translation: unpredictable consequences: you are welcome!

http://www.zerohedge.com/news/sp-downgr ... -full-text