Monday, June 27, 2011


I've noted several times over the last few months that although the program named QEII has a terminal date of 6/30/2011 we aren't likely to see the end of heroic measures to manipulate and game the free market system.  The Federal Reserve continues to highlight that they will continue to make purchases of bonds over the next year or so as maturing bonds roll off.

Here is a choice quote from the article.
“I don’t think the Fed wants to remove accommodation in any way, shape or form,” said Matt Toms, the head of U.S. public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. “It’s quite natural for them to reinvest cash,” he said. “That effectively maintains the accommodative stance.”
The Fed will continue their operations for a number of reasons.  First, they can't draw down liquidity in the system because much of the gains in asset values in stock markets and commodity markets come directly from the additional stimulative work the Fed has done.  By forcing Mom and Pop and institutions away from money markets and fixed income investments and into risky assets they have provided the feeling that things are getting back to normal.  Remember, if stock prices go up, the wealth effect kicks in and you and I get to spending right? 

Second, the Fed and Treasury are working in tandem to buy treasuries and mortgage backed assets because if they were not the buyer of last resort the USA couldn't not meet its debt and interest payments and continue the amazing pace of deficit spending and government growth.  There is no way the government could actually find enough buyers at these rates without the Fed and Treasury's influence in the bond market. 

Third, the activities the Fed will continue under this program gives them cover for operations overseas.  I hadn't really thought about this until today, but the massive size of the Fed's balance sheet and their constant work in markets gives them an incredible ability to run "black programs" elsewhere in world financial markets.  Think back to the 1980's when we heard of $200 hammers or $600 toilet seats, did those items really cost that much?  Clearly the answer is no, but the marked up tools and fixtures were ways of diverting excess money to other projects that were not approved and were funded by these creative financing methods.  In the same way, the Fed is working under its self-appointed power in QE I & II, but the sheer size of their work probably has allowed them to mask repos and swaps with foreign banks and countries that would raise concerns domestically.

In summary, the Fed is wrapping up QEII only to not wrap it up at all.  The USA cannot afford to allow a market with full price discovery because we would not see buyers at these treasury levels.  Buyers of treasuries today will lose significant amounts of money if interest rates rise even 1% on the 10 year.  Given those pricing dynamics, I wonder who is stupid enough to buy all of those new 10 years bonds?  If your answer was the Fed you'd probably be correct.  Welcome to massive losses Mr. Taxpayer, this is your reward for failure to rein in the Federal Reserve. 


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at

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