Wednesday, May 27, 2009

Time For QE2?

The bond market has spoken, and it demands QE2 (the equity market is insane - it has no idea what it wants). The way treasuries and mortgages are trading, the situation threatens to very quickly spiral out of Bernanke's control (and then how will Wells and BofA pretend like they have some recurring cash generating power? On the non-recurring front, AIG has already been tapped dry.) The table below indicates that based on 2009 supply (not to mention outstanding notionals) the Fed will have to reach into its toolkit for some other (very drastic) measures.

It is painfully obvious that the status quo will not suffice. So the real question is what is the Fed waiting for?Is Ben merely afraid of China's reaction to the imminent launch of QE 2-xxx - that would seem like an irrelevant issue as marginal refi/lenders are about to be priced right out of the market, at the same time as house prices are still dropping, thus destroying absolutely any incentives for (highly confident) consumers to lever themselves up.

Of course, the traditional repricing of govvies would involve a dropping stock market (and actual, non-transferable corporate risk), however with all the garbage propaganda about green shoots and all that other crap, combined with government backstop programs of every kind and with a disappearing market liquidity, Bernanke et al have made it impossible to price equities properly: one mere needs to observe the lack of sellers after any plateau.

As for the dollar, while it has gotten phenomenally cheap recently, it is only a matter of time before the Eurozone caught up, as it starts to feel the true impact of the trillions of toxic assets, which are allegedly marked at even more ludicrous levels than their U.S. counterparts. Of course, there is the South Korean Won safe haven...

So while Bernanke contemplates the Catch 22 of his most recent Frankenstein, I present the chart of the 30 Year (not the 10 Year I have been focusing on). Although, one would not know that by looking at it.

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