The End of QE, Bear Stearns Dirt, The “Consumer Recovery,” Incendiary Reader Mail and More!

• Fed support for mortgage-backed market officially over… why it’s bad news for stocks
• Coming clean on the Bear Stearns bailout… what the Fed didn’t want to reveal, until now
• A consumer-led recovery? With unemployment and declining incomes… what they’re spending
• Gold and the dollar: One of 2009’s investing trends continues to crumble in 2010
• “Clueless,” “war criminals,” and other fiery rhetoric in the mailbag

Can you feel it? The world is in a different place this morning.

Yes, the sun is still shining, birds still chirp and the hype over Apple’s iPad is still building beyond an already insufferable level. Your world may appear normal. But there’s a qualitative difference to the economy today, brought on by the absence of “quantitative easing,” or QE — our favorite acronym of 2010.

Under the program, the Federal Reserve graciously bought $1.25 trillion of mortgage-backed securities from panicky banks and hedge funds over the last 12 months. But now, it’s over. Today, the stock market lost an important undergarment… and we suspect it will begin sagging dramatically, soon.

  In more direct terms, the Fed has stopped “funneling new fiat money into the mortgage-backed security market,” explains short side strategist Dan Amoss, “which, in turn, freed up extra cash for portfolio managers to recycle into bonds and stocks. This fiat money is the illusion of real savings. It goes a long way toward explaining how a country deficient in savings can fund massive government deficits at low rates and aggressively bid up the prices of stocks.”

So what happens now?

“We’ll see a more natural relationship between savings, money flows and stock and bond prices,” says Dan. “It probably won’t be good for bulls.”

That is, if the Fed sticks to the plan.

  As soon as quantitative easing came to an end at the close of business yesterday, the Fed came clean on the toxic assets it bought two years ago during the Bear Stearns bailout. This is the stuff JP Morgan didn’t want to risk its own capital on when it agreed to take over Bear… so the Fed agreed to put you, dear taxpayer, at risk instead.

• Face value of the assets: $75 billion

• Value when the Fed bought them in March 2008: $30 billion

• Value at the end of 2009: $27 billion, provided they can now find a buyer

Among the motley assortment of assets now in the Fed’s portfolio…

• $619 million of securities that were backed by mortgage lender Countrywide. They’re now rated CCC — eight levels below investment grade.

• A portion of the loan on the Hilton Garden Inn in Panama City, Fla.

• And a portion of the loan that created this:

The CrossRoads Mall in Oklahoma City. Four anchor tenants have bailed since 2006…
And now you’re on the hook. Love it.

On the grounds it would make it harder to sell these assets in the future, the Fed fought to keep these details under wraps for the last two years. Bloomberg News had to sue to get access.

With QE out of the way, what the Fed needs now is a healthy public audit — a scrub-down behind the ears, between the toes — before the next “rescue operation” is conducted in secrecy. Otherwise, our tickets to the front row as this entire scheme unravels will expire worthless.

  Until then, it’s party time. Consumer spending is up for the fifth month in a row. We had the rare occasion to sit in an interview with Bill Bonner and local radio personality Ron Smith yesterday.

“Why are consumers spending?” Ron wanted to know, “Unemployment is still up around 10% officially. Unofficially, it’s much higher.”

“Exactly ” — we paraphrase Bill’s answer with the assistance of an essay he penned in The Daily Reckoning on Tuesday. “How is it possible for people without jobs to increase spending? The Wall Street Journal reported Tuesday morning that personal incomes have dropped across the country.

“Unemployed people whose incomes are falling are nevertheless spending more money. What are they spending?

“Tax refunds! It’s refund season. And a lot of people are asking for refunds. People who lost their jobs, for example.

“It’s the Feds to the rescue again. They’re sending back money to the taxpayers who earned it. We have no quarrel with that. And it certainly gives some air to the folks who are trapped underwater in their sinking ships. But that oxygen was earmarked for other spending. And so now the Feds have to borrow more.

“We’re expected to believe that they can borrow as much as they want for as long as they want without ever getting into trouble? And we’re expected to believe that an economy that sank under the weight of private sector borrowing can now be refloated with more debt in the public sector…”

Apparently, the answer is yes. Callers into the show confirmed it.

Agora founder Bill Bonner on The Ron Smith Show,
WBAL, in Baltimore yesterday

  First-time jobless claims shrank by 6,000 last week, to 439,000 – right in line with what the street was expecting.

And that’s as good an excuse as any for a rally. The Dow opened up nearly 1% — more than wiping out yesterday’s losses, driven by a lousy employment report from ADP — which zeroed in on private-sector hiring (i.e., not skewed by Census jobs).

Tomorrow brings the Labor Department’s monthly employment report for March, but traders won’t have a chance to react till Monday; the NYSE is closed for Good Friday. Currency markets, however, will be open… so they’ll be sure to react.

  Gold sits at $1,124 as we write. The Midas metal has now registered its sixth straight quarter of growth.

And in the two months since we first noticed the inverse correlation between gold and the dollar starting to break down, the trend has become impossible to ignore. What was obvious in 2009 is no longer so.

”From March to December,” says our resource trader Alan Knuckman, “the declining dollar inversely supported gold prices moving higher. Notice the last few months where the dollar has made a 10% upward move and gold has remained steady to higher for bullish divergence.”

It was just two weeks ago that Alan’s readers had a chance to grab 64% gains on a gold play. For more where that came from, check out Resource Trader Alert.

  “It seems nearly inconceivable,” says our forex specialist Bill Jenkins, “that the dollar should be embarking on any kind of serious run, but we are also well aware of the irrationality of the market.”

“This week, the dollar was the beneficiary of seemingly good news about the U.S. economy… only to be dealt a setback with the first job numbers from ADP yesterday.” With today’s jobs news, it’s perked up past the 81 level again.

So “the real question becomes is the dollar being viewed as something more than a safe haven? Is it morphing into an asset? Are traders going to start viewing the dollar as a viable holding tool?”

”It is hard to imagine holding dollars when the interest offset is so great against counterparts like the kiwi and the Aussie. But under the ‘dogs’ theory of the markets, last year’s whipping boys become this year’s stellar winners. And tomorrow’s figures have a lot hanging in the balance.”

  The latest ISM manufacturing survey helped goose the markets this morning, too. The ISM rose from 56.5 in February to 59.6 in March. A 50 is, of course, the DMZ between expansion and contraction.

  China’s manufacturing is gangbusters as well. The Purchasing Managers’ Index jumped from 52 to 55.1 last month. (It uses the same yardstick, more or less, as ISM in the States.)

  The anticipation of a real economic recovery has powered oil to nearly $85 a barrel – the highest in 18 months. Whoops… that can’t be good if all this “recovery” is supposed to have any staying power beyond stimulus and low interest rates. We’ll keep our eyes peeled…

  “In response to the Air Force brat,” writes a reader, inciting a food fight over yesterday’s mailbag, “tell me how invading Vietnam and Iraq protected free speech? If I remember correctly, the government shot people because of free speech at Kent State, tried to ruin a senator’s career and outed his CIA wife because of his free speech.”

“A militia membership is honorable. Dropping bombs from high-tech planes, killing civilians is far from honorable. Standing armies are dangerous, and those who belong are puppets.

“Sorry, hunny, but your father probably didn’t have the ability to earn a decent living elsewhere.

“One last thing…In Fog of War, McNamara comments on America’s actions in Japan in World War II, saying that if they lost, they would have been considered war criminals…so that’s what the Air Force brat’s father was a part of? Congrats — the victors do write history.”

  In contrast, “The author stated it very elegantly,” says another reader, “and I am pleased that you published it.”

“I am an RVN vet who served 39 months in the combat zone during the ’60s. I am not only proud of my contributions during that politically ill-fated effort, but believe my service has greatly influenced my five children in understanding what honor, dignity and commitment to service to this country is all about. All of them have followed my example with service in the military, Habitat for Humanity or other worthwhile endeavors. They are all fine, taxpaying citizens and are better off because of it.

“I did not read The 5 that prompted the lady to make her comments, and am glad that I did not, as I would likely have been so exercised that I would not have written this.

“The lady said it all with her comment: ‘It’s a [very] painful irony that the military, who fight to maintain the freedoms of speech and others we have, are so reviled by any group, however small, of clueless, acerbic and undeserving beneficiaries.’ It is that group of self-serving takers who infuriate the ever-diminishing, hardworking citizens who still cling to the ideals of our Founding Fathers and the Constitution. I continue to believe that we will ultimately win.”

  “I’ll go out on a limb,” says a reader who gets today’s last word, “and say that all those fine young men and women lured by a payout after serving a bloated military force sacrifice more than a normal life and mind, but their contribution to society. The military takes people in their prime to perform a mind-numbing, soul-killing, destructive task.

“Surely, the military is necessary, and some people actually are called to that kind of life, and we all should be grateful to and honor them. But when there are over 200 bases around the world, some of the biggest ones in places where the last shot was fired over 60 years ago, it’s clearly just a racket to be used by presidents whose popularity is low and are seeking a boost by not declaring war on not-so-innocent suckers, condemning to death thousands, be they in Granada, Iraq, Serbia, Afghanistan, etc., all the while exploiting a naive and cash-strapped youth.”

“It’s about time for America to decimate its military. It’d likely still be the mightiest military in the world, but we wouldn’t have to foot a trillion-dollar bill every year to prop up such an unproductive activity. Otherwise, much like Eisenhower implied, we’ll become ???????.”

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. “Last week,” writes Patrick Cox from the front lines of the innovation cycle, “three major scientific developments were announced regarding progress in the field of RNA interference. Once again, the companies involved are in our portfolio…”

If this were a baseball game, it would still be the middle of the first inning. Pfizer in its early days returned 2,300%. Would you pass up a chance to buy if you’d already missed the first 100%? That’s what we’re talking about. Details here.