(As an introduction, anyone see the price of wheat and corn lately?)
I’ve been pondering this question recently. It’s one thing to break down market action into two camps (Clam moves, Clam doesn’t move). It’s quite another to say, “If Bernanke decides to intervene in the markets, just what exactly will he do?”
Case in point; his favorite maneuver up until now has been to directly purchase U.S. bonds on the open market. This serves three main goals. (1) He forces yields lower, which in turn aid all sorts of derived interest rates for consumers such as mortgages. (2) He expands the monetary supply, which was a key goal of his given the amount of deleveraging that was going to occur, and (3) he creates an automated form of monetary retraction which occurs at precisely the rate at which the bonds redeem, helping to form a sort of stable safety measure should things get out of control on the inflationary end.
But, with 10 year U.S. treasury bonds hanging out around 2%, it’s difficult for me to imagine that Bernanke is too excited about the prospect of buying up more treasuries.
In terms of the three effects of this action, it would still technically play into (1) and (2), but with (1) yields are already so low, if people aren’t being incentivized to buy and invest now, it’s difficult for me to imagine a couple thousandths of a percent (at an enormous cost to the Fed, I would add) is going to really change that. And with respect to point (3), paying for bonds at a lower yield also slows the scheduled withdrawal of money from the economy, making the control the Fed has over the supply less potent.
And, another point: I know everyone is keen to pretend that inflation isn’t an issue right now.
But looking at the prices of grains recently (refer to top), that’s not entirely honest. Materials are significantly cheaper than they were trading a month or so ago. But food is still very expensive, and getting more so.
If Bernanke eases the U.S. economy, he threatens to create a localized inflation in the grain market, which given its already lofty disconnect, could very well threaten to starve out American poor, as well as much of the rest of the planet.
After seeing the way food prices are not deflating like crude or copper, I am not now convinced more Fed action IN AMERICA is guaranteed (pardon my grotesque capitalization usage, but that’s important).
However, could Bernanke perhaps intervene by trading dollars for Euro’s, and then buy up foreign denominated debt?
It’s obvious that Europe’s problems are America’s. And that much of this debt/leverage needs to be unwound. However, in this situation, Bernanke’s actions would be net neutral on the dollar inside of American markets so long as those dollars stayed in foreign reserves, while also giving Bernanke a much higher yield for his hand.
If managed correctly, they could unwind both the debt of foreign nations and the added currency relatively quickly.
If I’m going to look for a maneuver by the Fed, it’s going to be along these lines. I just don’t think they can risk expanding the monetary supply here at home too much more. All of that money would immediately start chasing up equity and commodity prices. Very little of it would go to new ventures, deleveraging, or pro-growth developments.
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i’m glad you said it……i have been doing all the major grocery buying in my household forever.just look at a sack of spuds almost 500% in less than a year and a half. a friend of mine has a meat packing house with 18 trucks,been in business with his twin brother for 30 some years went in there two weeks ago for the 2 inch lamb chops. he says no have anymore…….what. the restaurants wont pay for it anymore, his cost,14 bucks a pound.so,from farm,to wholesaler.after 30 some years……….dude wtf…after high school i spent three years working at the south water market slinging produce.i remember all to well when the manipulation of lettuce went down.head of lettuce,25 cents a head. overnight it went to a buck.well, what the hell happened from farm to market while the lettuce was in transit? the world blew up………..this is not cool by any means.for the first time in my adult life growing up on the streets of philly and chicago,i dont like what i’m seeing, ,and its getting a little scary.
It is worth adding that in the past two weeks severe hail storms have hit crops in Alberta, Sasky, Nova Scotia (not really important size wise), but crop insurance claims are at highs compared to recent years.
Something to think about as well.
Wicked post summarizing a lot of hypothesizing I’ve been involved in between friends.
I was not aware of the weather issue.
I agree with the thought of no QE3 in the form of bond buys on the long end but i doubt the fed plans to pick up some of the european bonds.
I’m not sure they would try to do so myself. The outrage here at home would be colosal.
But it would be one way to calm the market and aid the global deleveraging.
Maybe they just start buying real estate?
“The outrage here at home would be colosal.”
Doing anything that might conceivably prop up non-US economies might make economic sense, but would result in domestic outrage and might then cease to make economic sense as well (tea party fundamentalism in all its absurd incarnations would rise and rule). At a quick glance, more QE looks attractive, but how can it not be met with outrage? Who wants a weaker USD, higher oil and staples?
Clearly and definitively stating that the Fed is not going to do anything would result in outrage, but is there a way to dress this up?
How would the markets react if Bernanke “merely” points out that there is cash in strategic places (the claim would be that once the markets stabilize the economy will be fueled by cash, finally trickling down from QE 1 and 2)?
OK, where is the cash? Have the banks absorbed it all and most of it will never been seen again? Have everyone from large corporations to individuals simply decided to put their cash into deleveraging themselves like never before (well, like not since the dawn of junk, CMOs, CDOs)? Not sure Bernanke will make the claim, but, the banks will reorganize; the market conditions are favorable for the creation of many more REITs (look at the current leveraging in some of the REITs – it’s at Lehman vindication levels) taking advantage of low funding costs and a fairly stable property market – this will, in effect, reorganize the banks whether they like it or not. REITs will become the new CMOs (let’s remember that CMOs worked well for a long time… before they didn’t). Hedge and P/E funds have been increasing in both deposits and numbers – again this is an external force that effectively reorganizes the banking sector. Then there are the large companies that have been simply waiting for stability – can anyone point to increased M & A activity (some of it at staggering premiums)?
After a bit more volatility and turbulence the banks will be back originating house loans (destined for the REITs), providing bridge financing for M/A deals with the assistance of external funds, they might make a business loan or two, and come around to running trade finance desks capable of doing business because their bank counter parties have finally become deleveraged enough to be taken seriously.
What about unemployment? It simply won’t do to claim that it will pick up over time as the economy improves, but, as Bernanke speaks for the Fed, he could simply dodge the issue and not provide any tangible/actionable advice and leave this issue for political debate. Will this be met with outrage? Maybe – but it’s not the Fed’s remit to fix it (even if they are guilty of causing it).
Is no QE, a bunch of platitudes about underlying economic recovery and systemic changes the path of least resistance for Bernanke at Jackson Hole?
Thanks for the input. It’s definitely been interesting watching the likes of NLY
Sold NLY Sept 17 puts at 0.30 two days ago, covered at 0.15 yesterday. More interesting spreads to scalp the yield without going long underlying are better, but the big question for the REITs is whether the market will “accept” that their funding will always be there – no short term access = no leverage (best case scenario lol). Two years out… who knows – my guess is we’ll be back leveraging our own CMOs (just like the early 90’s).
NLY has been one of my long term favorites. I’ve held this for years. Love the dividend. AGNC has been nice also.
awesome cain.. check the PG out, “How is the view from the 9th floor?”
The view is mostly clear with a chance of earthquakes.
How was Tel Aviv?
Amazing.
I’d love to go back.. in fact, I’m working on it as we speak 😛
I want to see The Clam come out and say something like “We’re buying shit and lots of it. Don’t you worry about that. But we’re not going to tell you what, for how long, or how much. Just rest assured the amount will be measured in multiples of ‘shitloads’. The time will be however the fuck long it takes.”
Let’s see people try to frontrun that shit compared to what happened during QE2. All the robots will know the Fed is out there gobbling up ‘stuff’, but since they don’t know what said ‘stuff’ is they have to buy a little bit of everything to cover all bases.
Then the clam can come out 6 months later and inform everyone they were buying dollars with all that shit they purchased…
What would about $500 bln worth of OTM $SPY calls do for the market? Any guesses?
He should buy Chinese bonds, fuck with their exchange rates and get a better interest return.
How can the poor be starved out? A familiy of three can collect $500/mo in food stamps. That’s a lot of T-bones, cokes and chips.
And besides, Ben already blew his wad on the 2 year 0% interest rates. He will defer to Obama’s jobs plan (after labor day). Why else would O meet with Ben the Wednesday before his vacation ?
Crops have been affected by various outside factors inc ethanol subsidies and weather… and flooding this spring, etc.
Gun to my head bernanke doesn’t do much. The president will wang credit and is planning some big announcement in a couple weeks. That’s my bet… bernanke defers to the pres.