Fed Almost Certain to Continue Buying Treasuries; How to Trade It

Excerpt:
Lee Adler of The Wall Street Examiner wrote last week, “The market sailed through a week of light Treasury supply with reduced POMO support. A big Treasury paydown this week put extra cash in dealer trading accounts and it did exactly what we expected it to. S&P threw a little glitch into things on Monday by putting the US on a negative watch. They probably just had a big client with a huge buy order outstanding. A little negative news and Voila! Done!
Next week, Lee thinks, will be a little more interesting. “POMO will be insufficient to absorb $52 billion in new supply. With that much paper to sell, the government will want to see yields lower. So be on the lookout for a 3 AM stock futures selloff in the pre market probably Tuesday and/or Wednesday. There’s nothing like a little stock market liquidation to get a buying panic going in Treasuries. If that doesn’t happen, then something will need to take a hit around May 2. That’s settlement day for $45 billion in new notes. We would need to keep an eye on the technicals for clues to which market would bear the brunt of that if there’s no pre auction liquidation of stocks.” (The Wall Street Examiner, subscription required)
Quantitative easing (QE2) is scheduled to expire at the end of June. In a recent interview with Jon Hilsenrath of the Wall Street Journal, Fed Chairman Ben Bernanke indicated that QE will not be pursued once the current program runs its course. In an interview with John Nyaradi of Wall Street Sector Selector, Phil pointed out that this is not actually the case. “QE2 isn’t going to end. This is a misnomer about QE2 because what’s going to end is the new funding. About 50% of what’s going in from the Fed now is rollover money... (The Fed) is buying 85% of the Treasury notes. They can’t stop. How could they stop? Who’s going to buy?”
When QE2 was announced, the budget for the program was set at $600Bn plus additional funds made available by reinvesting principal payments from agency debt and agency mortgage-backed securities. Those additional funds boosted the total budget for QE2 to somewhere between $850Bn to $900Bn. In other words, the Fed had between $250Bn and $300Bn available to use for buying Treasuries during QE2, funds made available from the performance of assets it owned at that time. Imagine how much more could be available to the Fed once it has completed purchasing another $850Bn to $900Bn worth of assets by the end of June?
So where does this end? In Phil’s opinion, it will eventually end in hyperinflation. “There’s no end game to what we’re doing other than hyperinflation because we have to pay off our debt ultimately. Look at how ridiculous it is. We owe $15 trillion. And we go another $1.5 trillion into debt every year.” There’s no chance to pay off a $15 trillion dollar debt by adding another $1.5 trillion in debt each year. At this rate, in ten years, we’ll owe $30 trillion.
According to Phil, “There’s no realistic way to pay off this debt other than gross inflation. That means we need inflation, and it has to be hyperinflation because the inflation has to occur faster than our debts are mounting.” So we have to grow the GDP so fast through inflation that it dwarfs the rising interest rates on the debt that we have. Then, with devalued Dollars, “we may be able to start making some payments.” (Phil Davis Discusses Options and Today’s Markets)
Jesse, at Jesse’s Cafe Americain argues that many years of stagflation is a likely outcome of the Fed’s 'managed inflation' policy. “The problem or twist this time around comes when the monetary stimulus does not increase jobs and the median wages, because of some inherent and unreformed tendency in the economy to focus money creation and its benefits to a narrow portion of the populace. The result of this is stagflation which although not indefinitely sustainable can be maintained for decades.” Whatever the flationary route, Jesse concludes, “the reissue of the dollar with a few zeros gone is inevitable.”
This week’s newsletter trade idea comes from Pharmboy,... read on.
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Fed Reschedules POMO, Stocks Bottom

Fed Cancels POMO, Causes Flash Crash, Stocks Continue Slide

New POMO Schedule for March 14 - April 11

POMO Schedule Jan 13-Feb 9

The Fed's new Insanity Schedule for the next 30 days:

POMO Schedule Dec 13-Jan 11

Fed's True Purpose: Permanent Debt and Wall Street Bailouts

This is amazing. This chart  from Tyler Durden at Zero Hedge blog shows (in red) the Fed purchases of US debt, and the stock market price (in black) response.

Here's how it happens. They call this "quantitative easing".
1) The big banks buy the US debt. The Fed calls them "primary dealers", but they are the same "too big to fail" banks that we were forced to bail out. The banks draw interest from the US treasury -- OUR tax money.
2) The bailed-out banks then "park" the treasuries at the Fed.
3) After a few days or weeks, the banks "sell" the treasuries to the Fed.
4) The Fed gives them cash for those treasuries. But the banks continue to draw the interest.
5) The banks buy stocks, commodities, and more treasuries with the cash. Prices go forever higher.

The Fed swears that this is prosperity. It's really just permanent debt and high inflation!

Is there any difference between this process and the Fed just printing more dollars to buy the debt? Here's the slight difference:

If they just "monetize the debt", the debts are paid off and no one gets the interest. If they use quantitative easing, WE pay taxes to pay INTEREST on the debt! It's the same thing, except that the banks get paid hundreds of billions in interest payments every year from OUR pockets. This is their compensation for creating trillions in bad debt, taking undue risk, and sticking it to the taxpayers? They get bailed out of the mistakes, and PAID to do it?

So why not just monetize the debt? At least that way, we don't have to pay $300 billion in interest every year! This proves that the Fed's real razon d'etre is to keep us permanently in debt and pay the banks, NOT to create jobs or grow the economy.

POMO Schedule Nov 12-Dec 9

The Fed's Endless Wall Street Bailout

Since the Fed can inject "liquidity" into the financial markets, but can't determine with precision where those funds end up, I suspect that at least some of the Fed's money-printing is finding its way into commodity markets as well. In other words, the Fed's clumsy hand is fueling another commodity bubble! The below document was dated August 2009, and this is only an excerpt of the Executive Summary. 

from Precision Capital Management:

The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date. Thanks to Thanassis Stathopoulos and Billy O’Nair for alerting us to the POMO Effect discovery and the development of associated trading edges. These auctions are conducted from about 10:30 am to 11:00 am on pre-announced days. In such auctions, the FRNY permanently purchases Treasury securities from selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B. These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital injections are able to leverage this money by 100 to 500 times and then use it to ramp equities.

Fed Admits to Manipulating Broad Financial Markets

Clearly, this includes commodities!

It is no secret that the Federal Reserve, and its now semi-daily interventions in market liquidity via ever increasing Permanent Open Market Operations (aka POMOs, next on deck - Wednesday and Friday for a total of about $7-8 billion), is rather hell bent on creating the impression that the economy is alive and well courtesy of a ramping stock market (when the causal relationship is always the other way around, but who cares). A reader got so disgusted by the POMO ramp game, he sent in an angry letter to Brian Sack's henchmen. Here is the Fed's response.

Dear Mr. (removed to maintain privacy):

Thank you for your recent correspondence in which you expressed your concerns about the Federal Reserve's influence on the stock market. 

The Federal Reserve monitors all sectors of the economy, so that we can be prepared when crises arise. It is within this context that the Chairman is often called by Congress to offer his views on many issues that may or may not be directly related to monetary policy. I want to assure you that the Federal Reserve's monetary policy actions are not aimed at correcting or influencing any particular market. As you know, the goal of monetary policy is to foster conditions conducive to sustaining sound, noninflationary economic growth over time and policymakers must make decisions that provide the greatest benefit overall.

Again, thank you for writing.
 
Sincerely,

JPD
Board Staff

So if "the Federal Reserve's monetary policy actions are not aimed at correcting or influencing any particular market" is it safe to assume that actions are aimed at "correcting and influencing" all markets in general? Well, the Fed is already rampaging in USTs, Agency securities and FX, would it be too naive to assume equities are for some reason excluded...

Fed pours $5.2 Billion Into Stocks Today

from Zero Hedge:

Today's POMO is over, and the result is a whopper: Brian Sack has just injected a record for QE Lite $5.2 billion in stock, in order to complete all the elements of today's orchestrated Obama Town Hall meeting, during which the president is now fully expected to announce that he not only managed to end the recession singlehandedly (what an opportune time for the NBER to announce its results), but that stocks are now ripping every single time he appears on TV (same goes for gold, oil, and pretty much everything else: and furthermore, Treasurys are unchanged, refuting all of Mr. Pisani's BS about capital reallocation in process). $5 billion today, add another $6 billion on Wednesday and Friday, lever up 30 times and you have some $300 billion in free buying given to the Primary Dealers so they can ramp the S&P to 1,150 by the end of the month. Job well done Mr. President. Too bad nobody but Wall Street and a few HFT prop desks care about the stock market any more.