Strong Moves from Bernanke
What a day. Checking in on the markets around noon Central time, I was wondering if we’d seen the top of the bear market rally. There wasn’t much positive price action in the equities I’ve been watching, and gold (GLD: chart, web, Y!) wasn’t making any great shakes either.
Then Bernanke went on a shopping spree.
When I checked back in around the close, nearly everything I was watching not only reversed course, but went into overdrive.
The Fed committed to buying up to $300 billion in long-term Treasurys over the course of the next six months, as well as nearly double the purchasing power of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, totaling $1.25 trillion (remember, trillion is the new billion).
To top it all off, the Fed also doubled the amount of debt it committed to purchase from the inept mortgage lenders.
Effectively, this action is much akin to chopping interest rates even further; when you’ve hit bottom on the interest rates, the next best thing to do is buy the debt. In a round about way, this increases the leverage on the banks side allowing them to borrow money at an even deeper discount.
Corner Office Comments
While all this sounds good on paper, and the market surely agrees, long term I’m not convinced this move was well thought out. What is the Fed going to do with all this debt in the long term? There was no exit strategy revealed.
Further more, anyone holding long term debt when inflation kicks in is going to get chewed up and spit out like something rotten. The Fed included. As the value of the dollar decreases, as readers of this blog remember I’m laying a significant amount of chips on some massive inflation, it’s going to take more of those dollars to service the debt the Fed is absorbing. The fact that gold and petroleum products rallied on the Fed statement seems to reinforce that position.
This move seems to spread much of the financial strain in localized sectors of the economy, more broadly the financial sector, further out over the entire economy. No longer are nearly worthless mortgage backed securities held by Fannie or Freddie, they’re held by the entire populous of the country (you and me).
From my standpoint Bernanke is throwing up his arms and wiping bad assets of public companies balance sheets, letting them start over, and forcing you and I to eat the bad tasting financial slop. Things will look rosy for a while, until inflation starts creeping into play and the government will need to print even more money to service the debt.
Any further upside to this rally should be used to capitalize on gains and readjust into a hedge against inflation, in my opinion.
Sphere: Related Content
