Saturday, June 9, 2012
SOMETHING VERY IMPORTANT TO THINK ABOUT THIS WEEKEND...........
Should the Fed not end its quantitative easing on schedule in June, but rather roll straight into a new round of easing (QE3), it will send an unequivocal signal to the market that the dollar is to be sacrificed for political expediency. At which point the waterfall collapse in the world's reserve currency could very well occur and any potential Treasury bond buyers - outside of the Fed, that is - will begin demanding higher interest rates. Those demands will have to be met, because the day that the Fed is effectively the sole buyer of Treasury debt will be the day the dollar dies.
Should the Fed step away from the auctions starting in June (and maybe, for propaganda points, in May), then the interest rate picture becomes a bit less clear. Will non-Fed buyers step into the $50 billion or so monthly gap left by the Fed's exit? Or will they demand higher interest rates, setting off the death spiral in the process?
Equity managers are fully aware of the importance that free-flowing money has played in the recent rally. A tightening by the Fed could almost certainly be the pin that breaks the equities balloon. In the case of Japan's first experiment of QE, following the collapse of its own housing and stock bubbles, during the quantitative easing the stock market rallied about halfway back to the bubble top. But almost immediately on stopping the easing, the stock market crashed back to earth, giving up about 50%. And what would happen in an equity market crash? If history is any guide, money would flee the equities in favor of the "safe harbor" of Treasuries. You can bet that this is also part of the Fed's calculations.
As far as the Fed is concerned, it has done exactly what Chairman Ben Bernanke has said it would do - shower the economy with dollars. By stepping away from the quantitative easing, Bernanke begins to act on part two of his monetary hypothesis; that the Fed can mop things up before the dollar dies and inflation runs out of control. EVERYONE THAT IS BULLISH ON STOCKS HAD BETTER THINK LONG AND HARD ABOUT THEIR POSITIONS AND OPINIONS ON THIS MATTER.
At this point, the Fed's hand is being forced. It really has no option but to step aside and hope for the best.
For awhile (two months? three? six?) the Fed's gambit may pay off as a sufficient number of fools rush in to take the Fed's seat at the Treasury auctions. So maybe rates remain flat or don't rise very much. But in the absence of the government making substantive cuts to current spending - there is, after all, an election to be bought - it is only a matter of time, and not very much time, before the Treasury's borrowing needs will outstrip available buyers and interest rates will have to rise. THIS WILL NOT BE AS FAR IN THE FUTURE AS MOST IMAGINE IT TO BE.
At that point, the endgame begins, leading to massive wealth destruction for the unprepared.
at 7:04 AM