Yesterday the Fed announced “no taper” so it’s full steam ahead with printing and monetizing. Ben Bernanke then did a press conference afterwards and basically said that “the economy is still not strong enough to warrant tapering.” Hmmm, not strong enough? But I thought we went from green shoots to recovery to expansion…normally over a 4 year time cycle? This is year 5 already…and we keep hearing “recovery, recovery, recovery”…where’s the “expansion” part? In any case, Ben Bernanke told us what we already knew, the patient is still sick and cannot stand alone on his own and still needs “crisis measures” to keep from collapsing.
Not that “tapering” is a big problem in the making. I am not even talking about the hyperinflationary aspect of it which is problem #1. The Fed already owns 31% of all 10 yr. US Treasuries outstanding and growing, they are withdrawing collateral from an already collateral starved system. The longer they wait to taper, the less outstanding collateral will be available for the shadow banking system to lend against. That is problem #2. Problem #3 is that the Fed just told the world that our economy still cannot, 5 years after the fact stand on its own without a $1 trillion deficit and another $1 trillion annual Fed injection of credit. Maybe I’m old fashioned or some type of curmudgeon but my first thought here is that even the average guy on the street is going to start asking some dangerous questions…on second thought maybe not as Drudge reported that only 27% of our population even knows what “QE” stands for let alone what it actually is!
So if the Fed can’t “taper” now, when can they? If the economy were to strengthen (which is highly improbable as every bazooka, cannon and ballistic missile of fiscal and monetary stimulus have already been fired) then interest rates would rise in the face of over leverage and strain any glimpse of strength. This is the problem now…and has been the problem since at least 2008, interest rates cannot rise or the house of cards will collapse. The “dangerous questions” mentioned above by the way will soon be asked by the “smart people” who manage money. And since the answer seems to be further and further out in time…a crowd will gather at the exits as has always happened throughout the history of bubbles…”The Fed” and their buying are now the only remaining exit.
This leads us to more questions and in particular one very important one. “What about the solvency of the Fed?” They are as you know levered at 50-1 and have already lost their capital 5 or 6 times in just over 4 months, what happens if the Fed itself comes into question? Would a 10 yr. Treasury yield over the whopping rate of 3% be enough to do this? Or how about a dollar in free fall? Did the dollar get killed over the last few days (and especially on FOMC day) because there was no taper? Or has it begun free fall because the Chinese have set up an alternative oil settlement mechanism using the Yuan instead of dollars?
Aw heck, I might as well just ask questions. Why no taper of $10 billion? Or even $5 billion? Would that paltry amount jeopardize the “recovery?” Wouldn’t that have given the Fed at least a teeny tiny thread of credibility? Would the system implode with a just little less free “juice” going into the system? Would such a small amount even make a difference considering the “benefit” of the Fed judging the system in better health? In the words of Rick Santelli, “What are they afraid of?” Is the system REALLY that weak? And if so then why are interest rates going up? …and why is the stock market at all-time highs? Aren’t stocks supposed to trade based on future earnings and then discounted by interest rates? The combination of events and “realities” just don’t add up, what kind of casino is this anyway?
The “box” that the Fed has now put itself in is that even a mention of slowing QE (not discontinuing it) causes selloffs in both the credit and equity markets. They floated this “taper” trial balloon back in June which, led to massive selling of Treasuries…maybe they just figured that the markets are so overblown and fragile that they cannot absorb ANY shift in sentiment at all. As I’ve said all along, they absolutely cannot stop QE but they absolutely must stop it because of the liquidity problems it will cause by shrinking the pool of collateral. Truly hilarious that a central bank made up of supposedly the greatest financial minds in the world would end up in a box of their own making.
I do want to point out that after or near the end of each QE in the past the markets would get “upset.” Each instance came sooner and sooner until now, now even the mention of QE slowing (not even ending) sends the crack addicted markets into turmoil. So I guess the question now is “when” will they actually slow down and begin to halt QE? December? Can they really? Will anything be any different than now? My guess is that investors begin to collectively recognize the “box” that the Fed now lives in and starts to panic. A panic now would be a disaster because unless there is something that we don’t see or know about…the Fed is out of bullets and the Treasury is “borrowed out.”
To show you just how imbecilic things have become…yesterday President Obama made the statement, “Raising the debt ceiling does not increase our debt.” So in a nutshell there you have it, either the President thinks that we are stupid…or he is stupid or not telling the truth (lying) intentionally. Raising the debt ceiling WILL in fact increase our debt more than $250 billion immediately because that is what will be needed to “pay back” all of the “extraordinary measures” that were used to keep kicking the can each morning since we hit the old debt ceiling. The President also tells us that raising the debt ceiling will protect our credit rating, allow us to pay our bills and not endanger the “full faith and credit” of the U.S. What a wonderful world it would be if that somehow all of this could be true!