Wednesday, March 18, 2009

Knee-jerk Response To Fed Stupidity

As the dust is settling, some good preliminary observations on how the latest (and maybe last) move by the Fed changes the landscape, from Bob Savage.
What worries people now?

1) FED surprise action begs the question of what do they know that the market doesnt? So many fear their forecasts for a much weaker economy.

2) FED action is viewed as the last measure. The ability for the FED to do more than this is now a game of how much more to buy. So the over $1 trillion expansion of its balance sheet announced today can be followed by more and more. But the shock and awe effect will be less and less. The last bullet has to be the most accurate and many fear it may miss the mark.

3) Deficits
and USD The action of the FED and the stimulus package sparks concerns over how the US will pay for this and what it means for the USD. So the break in the DXY at 85. The risk of a much bigger down turn in the USD is set up by the charts and many fear it will be part of policy. Weaker USD flows out of this action.

4) Inflation This worry seems years away but many will watch for it and trade accordingly. The risk stems from the FED being ahead of deflation and therefore well behind risk of inflation. Being able to discern the difference will be tricky eventually but it’s a risk that wont be known until its too late not unlike reading in the garage with the car on.
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9 comments:

Anonymous said...

As the bullets run out the cheerleading is picking up pace.

60mins this Sunday will be all Obama for this weeks infommercial.

Teusday night - Obama prime time address to the country (maybe he will announce Geithners gone....)

I wish he would spend more time in the office and less time on TV!!!

TraderMark said...

#1 is what I said on twitter multiple times in the middle of the euphoria this morning.

We'll see if CNBC drags on some sensible economists tomm morning or stick with the rah rah! group

Anonymous said...

Obama should get together with Cramer and do a weekly half-hour show.

Please shoot me now.

But What do I Know? said...

What's interesting is that the asset which moved the least was the very one which the Fed said it was buying--the 30-year. I guess everyone bought some last year and was waiting to sell to them,lol. The problem is that the Fed may wind up having to buy "all" of the Treasuries outstanding to keep rates low--since they are the absolute last buyer there is no one for them to sell to. . . Check out the bid-to-cover ratio of the auction the Brits did--7 to 1 or something like that.

Coincidentally, the (official) national debt exceeded $11 trillion yesterday for the first time--less than six months after it first exceeded $10 trillion. I think Mr. Bernanke's $300 billion is going to be used up rather quickly.

Love the blog, BTW--keep up the good work.

Yossarian said...

Like many of you I am sickened by this monetary madness. And I think a deflationary deleveraging is optimal for this country as it would move both assets and leadership from weak, incompetant hands to strong hands (think Ken Lewis to John Paulson) while preventing yet more of our precious resources from being misallocated to wealth destroyers.

However, the incompetant powers that be clearly have no intention of giving up their control. Thus we see Ben's helicopter flying high. So what is to stop them from taking all debts- good and bad- off the hands of banks insurance Co's, and other financial institions in return for cold hard cash. With assets safely parked on the Feds computer screen Helicopter Ben can simply collect the interest and buy more Treasuries with it. If Joe Sixpack defaults on his new BMW then Ben can simply click the Delete buttom a few times and watch those debts disappear. So the Feds balance sheet declines somewhat- would anyone notice? Would it matter at all? We all start again- the leveraged banks and consumers and the responsible savers- and see who can win the race to lever up one more time.

Junior said...

So anyone see Lost the other night?

Point being... no one cares. Even after all of this, even after the Fed sending out what could be the final arrow remaining in its quiver. No. one. cares.

You have a handful of Americans who get this. And then you have the rest happily trotting along blissfully unaware. They understand something is amiss. But they don't even want to peek.

The Fed is digging a grave for the dollar - and its action tells me that that may be its intention after all. For Bernanke to believe he or any of his FOMC henchmen are talented or bright enough to ride out deflation and use this as a tool without destroying the dollar in the process is completely asinine on their part. They're idiots but they're not stupid. Nor do I believe Bernanke is all that cocky.

The Fed just launched the WMDs.

CreditTrader said...

thinking of buying long maturity flatteners (buy 5Y CDS, Buy long-dated bonds) looking for corporated curve to flatten as long end TSYs steepen - lots of carry in the basis and low dollar prices hold long duration under control...

DH said...

Is this the IRENE moment?

"All units, IRENE. I say again, IRENE" ...

http://www.youtube.com/watch?v=9yOEOJ1BARk

anesha said...

Hi Nice Blog . I don't really know a lot about Knee or art, but that's just my 2 cents. Really great job though, Krudman! Keep up the good work!