Sunday, March 27, 2011

When The Fed Heads Speak, Does Anybody Listen?

The general consensus of the alternative economists is that QE2 will undoubtedly turn into QE3 - 4 - 5 - ... The economy will cease to exist if QE2 is allowed to end. Perhaps this is so. But just as there was a pause in QE after round one, why is everybody so sure there will not be a pause in QE after round two?

The Fed is under tremendous pressure to cease QE2. It is being blamed for the relentless rise in commodities, particularly the rise in food costs which have lead to revolts across the Middle-east and North Africa, and energy costs. Perhaps it is necessary for the Fed to unplug the QE machine in order to create the "demand" for QE3. Hey, it worked like a charm after they shut down QE1. Remember the deflation scare last summer that was used to justify the implementation of QE2?

Think about what will happen if the Fed shuts down QE2 in June as scheduled. The strength in the equity markets and the rise in commodities has all been the result of the Fed's QE2 program. Prices began rising even before the program was officially announced following the November elections. Pull the plug on QE2 and you pull the plug on the stock markets and the commodity markets. All hell breaks loose. After the pain becomes unbearable, in rides the Fed to the rescue once again.

But who will buy the Treasury's debt if the Fed steps aside? There are many commentators and analysts rightly asking the question - "once the Fed supposedly stops buying all these Treasuries at the end of June, just who is going to step up and buy all of this US debt especially at these low yields". That's an easy answer...the same group that is buying the stocks and commodities. The banks will buy the bonds the Fed stops buying.

Where does the money running out of the equity and commodity markets always run to when their markets go down? It runs into the bond market! There's the money to buy the bonds, AND the buyers anxious to buy them.

Hey, why not?

The Fed went to great lengths this past week to telegraph their intentions to shut down QE2 in June as planned. Recall, the Fed telegraphed their intentions to start QE2 for weeks before they formally announced it. By the time they announced QE2 last November, the only question remaining was "how much money will they print and spend" once the program began. Why wouldn't they wind down the program with the same Fedspeak, but in reverse.

These Fed heads were running their mouths all week:

Fed's Fisher: U.S. Debt Situation at Tipping Point- Reuters

The U.S. debt situation is at a "tipping point," Dallas Federal Reserve Bank President Richard Fisher said on Tuesday, and urged the U.S. central bank to refrain from any further stimulus measures.

Fed’s Fisher Sees ‘Extraordinary Speculative Activity’ in U.S. on Stimulus- Bloomberg
Federal Reserve Bank of Dallas President Richard W. Fisher said he sees “extraordinary speculative activity” in the U.S. after the central bank pumped record amounts of stimulus into the economy.

“There is an enormous amount of liquidity sloshing around,” the regional bank chief, who votes on monetary policy this year, said in a speech today in Berlin. “There is abundant liquidity in the machine we know as the United States economy.”

Fed's Lockhart: High bar for QE3- Reuters
The U.S. economic recovery is on solid ground, making it unlikely the Federal Reserve will extend its bond-buying stimulus program, Atlanta Federal Reserve Bank President Dennis Lockhart said on Friday.

I remain satisfied that the current stance of monetary policy is appropriately calibrated to the current and projected state of the economy," Lockhart told the Bonita/Estero Market Pulse Conference.

Plosser Says Fed Should Detail Asset Sales While It Raises Interest Rates- Bloomberg
Federal Reserve Bank of Philadelphia President Charles Plosser laid out a strategy for withdrawing record monetary stimulus and said the improving economy means policy makers should consider how to exit.

Fed's Bullard Says ‘Pretty Good’ U.S. Economy May Allow Early End to QE2- Bloomberg
U.S. Federal Reserve policy makers should review whether to complete a second round of quantitative-easing purchasing due to end in June because of strong U.S. economic data, Federal Reserve Bank of St. Louis President James Bullard said.

“The economy is looking pretty good,” Bullard told reporters in Marseille, France, today. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short.”

Four Fed heads step up and talk down QE2.  Ironically, the perennially hawkish Fed Head, Thomas M. Hoenig, has chose retirement:

Hoenig announces October retirement from Fed- AP
Thomas M. Hoenig, the longest serving of the Federal Reserve's 12 regional bank presidents, announced on Friday that he will retire on Oct. 1.

Hoenig, who had headed the Fed's Kansas City regional bank since 1991, has opposed the Fed's efforts to boost the economy through an extended period of low interest rates and the purchase of billions of dollars in Treasury securities.

He dissented against those policies at all eight Fed meetings last year. He argued that the Fed's efforts to spur growth could kindle future inflation.

Ain't life a bitch.

Fed Head speak about the "end of QE2" may be passed of as "just talk", ...yada, yada, yada
...  But if you expect to see QE3, you'll need to accept the end of QE2 first.  The need for QE3 may be obvious, but the demand is so far lacking.  Create demand for QE3 by crashing the stock markets, and QE3 will be here quicker than you can say "too big to fail".

Silver and Gold are at a bit of a crossroads as we move into a new week, AND the end of the first quarter.  Options on futures expire Monday March 28.  Futures expire the 29th, and first notice day for April Gold delivery in March 31st.  And on Friday, April 1st the always nefarious monthly Non-farm Payrolls Precious Metals raid.  What an interesting week we have ahead of us.

It would be difficult to hazard a guess as to the Precious Metals bias this week, and going forward into April.  I continue to urge caution when making purchases up here.  The charts posted below are focused on levels of support as a tip of the hat to our bad boy bankers:

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