QE2: The Fed has No Choice and They Know It

I am going to start off with a small piece from the Head of Treasury trading at Gleacher, Glen Capelo:


“Don’t get me wrong. We have been adamantly bullish for more than 6 months for various reasons: Greece, Changing of the Rules(Obama), technical charts, and ultimately, (The Banks not being able to lend), the Japan like scenario.  But now we are Priced to Perfection. Macro theme I’m still bullish, but now everyone is in the pool…the price patterns seem to be telling me that the bigger verticality higher is shut off.  I think the skew is 3 to 1, for the near-term.” (favoring lower bond prices)


Glen’s comments refer to the bond market, but they could apply to most every other market, as markets have priced in the best of all possible scenarios, in my opinion. Markets are being fueled by momentum, and at some point, the momentum exhausts itself. Bullish consensus numbers in most markets, (stocks, bonds, foreign currencies and precious metals), are decisively high, meaning that everyone is already in the pool, as Glen puts it.


* James Bullard, St. Louis Fed President: This morning, CNBC hosted their 6-9am show from the St. Louis Fed, and James Bullard was interviewed for a good part of it. He spoke very well about the balanced intentions of the Fed, and took some rather pointed criticism about how ineffective further QE is likely to be. In short, he disagreed that the Fed “is pushing on a string”, and that further QE will have an impact, if and when utilized. He was also very precise to mention that he thought that additional QE should be implemented as economic conditions warrant, and in modest, say $100 billion increments.


It was a very remarkable interview, and you can catch some of it on the CNBC’s website, it was impressive how candid and well spoken Bullard was, even if I disagree with him. Here is a link to CNBC’s website, which has a few links to various parts of this 3 hour session:


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* Ponzi Scheme: A reader writes in with this comment, which is a bit more harsh than how I would put things. Nonetheless, it is quite eloquent, and captures many issues which illustrate why the current happiness in the market place camoflauges the disaster which is waiting to happen:


“The Fed has to do QE2 because they have no choice.  They and the Primary Dealers (PD) and the US Treasury have been doing supporting each other since the crash of 2008.  It seems to me the Fed has no choice in QE2.


It has nothing to do with them carrying out their “dual mandate“.  They couldn’t give a rat’s ass about the “little people”.  It has everything to do with the provable Ponzi scheme they are running in conjunction with the US treasury and TBTF banks. It takes at least 3 entities to keep the illusion of a Ponzi going hence you have the trifecta of the Fed, the Treasury and all the PDs.  They stumbled into this arrangement of passing the football (in complicated and not so complicated mechanisms) and it has worked for a while now.


You sell me this, I sell you that, we sell to him, he sells to us, and we promise to buy it back. And we’ll leverage it and make a “profit”. And here is your bonus for doing it so well. And we’ll all carry our “balance sheets” and show no one. Just tell ‘em everything is fine. We own you. We own your malls too.


ITS ALL RUBBISH. They are bankrupting us.


The mechanisms though must be faltering I would think. They are running out of holes to hide the stinky stuff.  That is the nature of Ponzi schemes.  A “steady state” is only steady for a while. Then when the system quivers, you must do something new and adjust or take renewed action.


Ah but we have a fourth pig to the party known as the GSE’s of Fannie and Freddie. This pig is insatiable and is not wanted at the party. But the pig must be fed or he will ruin the whole gig.


I may not be a the brightest guy on the block, but the thing stinks to high heaven.


The Fed has slowly unveiled QE2 as if they have the choice and are in control.  They have no choice and they know it. 


It may be the beginning of the end for our financial structure as we know it. 2012 is not far off.  The best I can hope for is massive deflation and we all just pull together.  I like the US dollar. Its convenient. I don’t want faith to be broken in it. 100% of Americans want the same. We like our dollar bill, its a powerful symbol as much as the American flag. (although backed by Gold would be the way I would want it)


To save the system you must let it fail. The Fed must be disbanded. The TBTFs must be broken up. Let my local bank print and back dollars. In the end I want to save our system. So I know it has to go through a big failure first (deflation and a lot of mass defaults on the Ponzi debt). Painful? Very.  But the opposite would be no system (or a new unwanted system forced on us) at all and that is anarchy. And debt slavery. We must free ourselves of the bad debt.  We must take our living standard haircut now or our children will bear our misdeeds for their entire existence.


It won’t matter whether we choose to do it or not. Nature’s laws will

force us. That which cannot be sustained, won’t be.”  (end of readers comment)


And as I have clearly pointed out in the past, the current administration is doing everything they can to keep bad loans from being foreclosed. In the words of the reader, they are hoping the stinky loans go away, or become good, by some miracle. The government is trying real hard to let delinquent borrowers stay in their house, which they will continue to neglect, and ultimately, the loss to the lenders will be greater due to the neglect of the defaulting borrowers.


I have another topic about the foreclosure crisis banks are going through. That will be something for next week.


* Conclusion: Whether you call it a ponzi scheme, or just mis-management, the down-sizing of our way of life is coming. How it unfolds remains a mystery, since it will be dependent on the actions of the government, which is not always easy to predict. And with the collusion within the ruling classes: banks, the Fed, the government, it is obvious that they will all do what they can to delay the day of reckoning. They cannot keep the stinky loans from smelling. Eventually the stench will get to be too great. Something stupid is coming. Just what remains to be seen.