A Recent Alert - Fed Prints a Trillion

Bonds will continue to behave counter-intuitively.

Bonds ARE behaving very intuitively when viewed from the perspective of a bond TRADER rather than a coupon clipper.
Late October 2008 was the first mention in the news of the Fed's "quantitative easing policy". On November 12, 2008 the US treasury auctioned more than $20 billion 10-year treasury notes. Demand for this treasury issue was of course intuitively high.
On November 15, 2008 for the cash outlay of $99,727 I received an IOU from the US Treasury for $100,000 plus an additional $187.50 in semi-annual interest payments until November 2018.. I honestly don't care about the IOU because I know the United States is not even going to exist by 2018. I most certainly don't care about the measly 3.75% coupon rate. These things do not concern me.
What DOES concern me is finding a ready BUYER for my IOU sometime in the next few months at a very handsome profit. The FED has already very publicly promised to buy my bond from me at some price MUCH higher than $99,727.. How much higher you might wonder??
In February, 2009 - less than 100 days after my initial 'investment' I flipped my IOU to some greater fool that is similarly expecting to soon profit in the exact same manner that I have profited. This guy most eagerly paid me $ 109,190 for that same IOU that I paid $ 99,727 for back in November. I didn't even have to tile or paint it first. I pocketed a clean $ 9,462 profit on a $99,727 'investment' in less than 3 months which works out to a ANNUAL return north of 35%.
Keep in mind this little example of a bond bubble assumed the cash purchase of an individual issue.. With a futures account I only have to put up 25% of bond's market value... This would increase my 35% annual return by a power of 4.
I wished the greater fool well. I am happy with my 35% return and I am sure he will be able to flip his $109,190 'investment' if he has not already done so with this latest Fed announcement. The greatest fool with the deepest pockets has already laid it all on the table for us to take advantage of. The Fed has promised to print money and buy everything the market will ever offer at some price higher than what the market reflects today. 3.75% was simply NOT acceptable in November and 2.75% is similarly unacceptably high in February.. Just how much is the Fed willing to pay for a 10-year treasury note??
Who knows- whatever it takes to re-inflate the housing market. A 10 year bond price high enough to drive the 10-year yield to zero as well perhaps.. Move on the to 30-year bond after that? The original idea is really kind of comical if you think about.. The BIG PLAN for the Fed is to buy up SO many bonds and drive the price of the bonds up SO very high that long term rates get SOOO low that I suddenly decide it would be a GREAT idea to go buy another house regardless of the offered purchase price. An old house being offered at 25times rent- no problem I'll take three of those please - it's free money right? But I'm sorry Mr. Bernake even if I could get a 30 year fixed rate mortgage of 1%, I am STILL not going to increase my debt load to buy another house to re-inflate the housing market for you. I lost my job back in December. I want LESS debt not more. All the free money I can get it just going to go into paying down debt not taking on new liabilities.
Bubbles are defined as markets that trade in high volumes at prices that are considerably higher than their intrinsic value
During the stock bubble market players ignored the silly notion that a stock price reflects the future discounted cash flow of the underlying company. During the housing bubble market players ignored the idea that a property was only worth the future discounted cash flow of rental rates. The bond bubble ignores the counter-party risk of the US Treasury, inflation and the 'intrinsic value' ie coupon yield of the bond.
The ever increasing rush into the booming US Treasury market is not fueled buy FEAR as the media daily touts.
"Investors just have no where safe to put their money."
"Investors push short term bond prices up to reflect negative yields because of deflation expectations going forward."
This market is still being driving by GREED. Meaning greed for money-in-hand, short-term profit, not coupon yield but FAST MONEY 'flip-that-bond' real-yield. This is simple momentum speculation fueled by the Fed's promise "drive down rates" through massive outright printing of money and the buying of treasuries.
Bernake says we MUST have higher bond prices TODAY! Nothing else will do BUY-BUY-BUY today cause the Fed has promised to pay you even MORE than you originally paid for it in the very near future.
If only I could convince the Fed to buy my house at 50% over market value instead of these stupid IOU's. THAT might actually not so magically re-inflate the housing bubble. Expect food and energy prices to march steadily up from here. The jig is almost up.

It will no longer matter because the current crisis was triggered by subprimes, which are part of a $500+ derivatives market and a total credit market from which we have Option ARMs and Alt As, whose interest rates may reset soon. Many of these instruments and generally the derivatives market are not regulated by governments.

Bailouts, no bailouts, it won’t matter, either. In order for the U.S. to recover, it has to export heavily and import and spend much, much less, and there will have to be much lower wages in order to keep exports cheap. But if other countries are also faring badly, then no one will buy what is exported. What’s left is to cut down heavily on many expenses and resource use, plant food, localize, etc.


Interesting perspective Gman. I appreciate you sharing your view on what’s going on. Getting caught up in group thinking can happen so easily; it seems like a good idea to at least consider other ways things might be playing out! Thanks.

Good post, Life.




Good points from the audio, agree with most but just don’t see a major price inflation in the near term.

Consider the following:

Let's say that money = debt and/or obligations

I think we have been experiencing inflation for decades. We have been experiencing hyperinflation for the last 5 years. Today we have it on steroids. What I see happening is a massive amount of defaults, especially when the counter-parties to derivatives contracts are asked to step up and pay. The result will be the destruction of money. Money via additional debt and printing that we are creating today is nothing compared to what will be lost.

Consider the following, with a couple of excerpts from the article linked below.

Iron Law of the Burden of Debt

“The liquidation value of total debt is inversely proportional to the prevailing rate of interest. In particular, halving the rate of interest by the central bank is equivalent to doubling the liquidation value of total debt. “

“If the interest rate is halved serially by the Fed (which has happened in the past, and may happen again, as interest rates can be halved any number of times without hitting zero or going negative) then, for example, upon a ten-fold serial halving, the liquidation value of the total debt is increased more than a thousand-fold (210 = 1024). This means that trillion is promoted to quadrillion, quadrillion is promoted to quintillion, and so on, in direct consequence of the serial 10-fold halving.”

“The result of the bailouts and stimulus packages will be a vast expansion of government debt, and a serial halving of the rate of interest to accommodate it, followed by the escalation of the liquidation value of total debt to the quadrillion and quintillion dollar range and beyond. Deflation will sweep through the land making prices and wages fall.”

Read the article, it may give additional insight.




Gman- I agree in the sense that that I also don’t see "major price inflation in the near term"

But what is ‘major’ and what is ‘near term’?

Before March of next year we will see official CPI greater than 9% with more realistic measures of CPI such as those tracked by shadowstats.com approaching 15%.

Don't get to stuck into thinking that the halving of interest rates is the only "tool" the Fed has to monetize our debt with.
When the Fed states ..."will employ all available tools to promote economic recovery and to preserve price stability."
what they are REALLY saying is that the 2007 pre-crash asset prices is the only acceptable floor price for these assets. In fact, inflation up from that old floor price is not just preferable but mandatory. We MUST have inflation and trust me, we WILL have inflation. And I don't mean in some distant future of 2012-2015. Bernake understands that our system will simply no longer exist in 2011 if he is not successful arresting falling asset prices post haste.
When people speak of all the various "tools" at the Fed's disposal to effect the economy it is important to realize that regardless of what "tool" they chose to utilize there really is only ONE simple lever in the entire economic system that the Fed has any, and in fact they have 100% total control over this lever. It is a binary lever that either says + or -.
The ONLY thing the Fed actually controls is the notational money supply. And by notational money supply I mean literally it really is just a notation. http://www.ljean.com/files/usenix.html A single number from which all other values are derived. Your infinitesimal slice of the world economy is literally some percentage of whatever notation the Fed decides to put next to the $$ mark in its ledger. It really is that simple. That really is the only thing the Fed actually does.
So rather than get caught up in exactly HOW or when the Fed will move that lever to + let me give you a recent example of just how simple it is for the Fed to do this.
Two years ago news stories were circulating decrying the "shortage of coins". Regulations had just recently been past to prevent the exportation and melting of our token coins but of course "These new regulations at best (only) forestall the inevitable for a while...". This quote is taken from a letter published by the Fed explaining in detail that the best solution for "coin shortage" was to simply change the notional value of that token we commonly refer to as a penny. Or as stated in the conclusion of the paper, which I highly recommend everyone to read in the link below - the Fed intends to one day simply "rebase pennies to be worth five cents."
This December 2006 publication was not in response to any type of worldwide crisis or catastrophic emergency it was simply explaining the obvious outcome of our debt based, inflation dependent economic system. The Fed paper explains how it is "inevitable" that a penny would be worth a nickle and details how to best effect this outcome in the near term. Just as it is inevitable that your house will one day be worth one million US dollars. It really will be that simple.
A feature of our notational money system is that there is no need to pass an executive order outlawing the private ownership of gold and devaluing paper currency by 57%. Tomorrow morning the Fed can make and announcement that every dollar bill in your wallet is henceforth worth $100 Dollars.
What bad debts??
The huge significance of this recent FOMC statement is that in great detail the Fed is very publicly acknowledging that it is not in any way limited to only monetizing short term government debt. The Fed is not even limited to monetizing government debt or GSA mortgage debt. Everyone's personal debt is notated in dollars. And that little notation next to the $$ symbol on the Fed's balance sheet is arbitrarily set at the whim of the Fed