What Would Fed Intervention Look Like?

(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.

So let’s get this straight. When Libya started this affair earlier this year, oil prices skyrocketed on fears of an oil supply disruption. Despite the fact that all oil needs continued to be met, oil just had to go above $100 because “that evil Qaddafi…”

But now, we have the rebels pushing clean into Tripoli in a one day offensive, the dictator is nowhere to be found, and wouldn’t you know it, oil is higher because “Jackson hole’s a commin’…”

Assholes, can you stop holding onto oil already? What is it going to take to get a push below $80?

Look, do you want to know how many Libyans faithful to Qaddafi remain in Libya? The answer is obviously not many.

How do I have the gumption to just jump out here and say that? Well, because I watched the footage of the fighting. And the Libyan rebels looked terrible at it. Absolutely God-awful, in fact.

This weekend, in between drinking with a group of friends, I watched as Libyans dressed in their regular daily apparel; guys who looked like if they weren’t busy fighting a revolution would have otherwise been manning their families 7/11 store counter; waltz around the middle of Libyan streets, clumsily, not even bothering to find cover, as they fired guns wildly at unseen enemies. I watched kids hanging out on tanks that they had obviously just learned how to operate. I watched a dude fight for his country’s freedom in a navy blue collared shirt.

If these people had encountered any real loyalist force, presumably of military origins, they would have got their shit rocked.

So you’ve got to assume at this point that there are just an overwhelming number of opposition members; so many that anyone in that country who actually has been trained to fight; has decided it’s not a winning strategy.

More importantly, the rebels hold the oil ports and strategic locations. They are going to keep those facilities on full operating capacity. After all, they have a rebuilding campaign to pay for.

So France’s oil needs will be met in full. Now Europe can stop dicking around in our oil markets and leave Canada’s precious resources to their rightful owners…Americans.

Just kidding Canadians…

But nope, now we get an oil spike into the week because people are just positive that Bernanke is going to paper bomb the shit out of this country.

The sad thing is they’re probably right. I’m going to have to unwind UCO. But it would have been nice to at least get some action in the oil markets that reflects the favorable developments coming out of Libya.

Listen here, this afternoon I have heard every explanation for why we are selling off.

It’s Europe. It’s manufacturing. It’s Germany. It’s confidence. It’s unemployment. It’s government debt.

It’s dumb to pinpoint all the market action on whatever headline, rumor, or jackass on CNBC is being hyped at the moment…that’s what it is.

These people have no fucking clue why we’re selling off. Frankly, neither do I. I can guess it has something to do with all of the above, and I’m wise enough to guess it also has to do with a lot of information I don’t have.

There are always unseen and unknown things going on; saying we lost 20% in four days because “Europeans/Americans are dumb” is silly.

There’s a lot of potential shit hitting the fan here, and until we understand that better, it’s best to check your convictions at the door.

Watching oil markets the last few days, you would have the thought the worst was behind us. Surely the manufacturing reports couldn’t be that bad, with oil prices being pushed higher? Must be some production demand in there, right?

Wrong. That report sucked horse cock.

But thankfully, even though I thought maybe we start to correct from here (and we may yet), I didn’t trust myself. Not after the last two weeks, I wanted to see a real sell off first, even if that meant I covered my hedge for a loss.

And I got one.

When Europe comes out in a few hours and starts saying “Ey, looky hear, we’ve fixed the problem,” (all Europeans are Swedish), rejoice, but don’t celebrate by buying champagne. Because they don’t necessarily know what the fuck is going on either. And they may not fix the problem at all. Or fix the wrong problem.

And above all, ignore the sulky voices on television. The moment we start to correct, these same people will be bouncing off the walls talking about what “made” the market go higher, even though right now they’re hiding under their desks.

No joke, I have witnessed with my own eyes as these tots have painted two very different market outcomes on the same cause.

Headline: “Markets are higher thanks to lower energy costs”

Markets reverse.

Headline: “Markets are lower with energy as confidence dries up”

Energy reverses higher.

Headline: “Higher energy costs drive markets lower.”

All of this could take place within a matter of hours. Sometimes, they leave the headline and just change a word.

It’s a game to these people, because they are children who have no clue what the hell is happening. Listen for their data, but ignore their input and analysis. Correlations are meaningless without causality, but causality divined from correlations are also usually wrong.

It takes wit to determine true relationships, and a grounded philosophy to understand that events will challenge those and render them wrong. The people on television barking out their assessments don’t have it.

You can use them as extensions of your eyes and ears. Learn to train yourself to cut through their bullshit and get to the kernels of data you can actually use. Discard the rest.

If we’re going to go down, I want to go DOWN.

UCO is cracking again; oh how sweet it would be if that short went below $30 once more. I don’t know if oil is properly priced here or not, but I’m deep enough in profits on my short that I can afford to sit on my ass and play spectator during the rebounds.

UCO isn’t recovering any time soon; that’s the beauty of derivatives. Once they expire worthless, there is no quick redemption for them. The balance you read about (1X, 2X, 3X, etc.) only works for a short price action distance going up.

But directly behind those contracts is something of a cliff.

Even decent downward price action can cripple the products. Should oil recover to $110, don’t expect UCO will follow along too far. And the longer before oil recovers, the worse off it will be as the more contracts will expire.

Of course, my longs are getting crushed right now. I will undoubtedly end down for the day, if we don’t recover. But I’m committed to my longs.

This is a buying opportunity, which I will take cautiously in a logarithmic approach; 10% levels at a time.

I never took the time to sell positions and lock in gains on this rebound. But if you look at CLP, AEC, AWK, or even CCJ, you’ll understand why I’m not too worried.

CLP and AEC recovered fully to their longer term trends. I’m not one to get emotional about technical issues, but this reinforces to me that they are in high demand. Their sell off was from indiscriminate liquidations and once those needs were met by the perpetrators the shares were gobbled back up with insatiable demand.

AWK also exhibited an exceptionally strong rebound and I am witnessing the epiphany hit the masses first hand that utilities make great replacements for bonds. I’ve seen several articles on the issue come out lately and have reason to suspect that (particularly if the funding crisis of countries, states, and municipalities continues) utilities like AWK will witness support as safe havens.

Remember back when I first joined the iBankCoin community and said utilities should be purchased because they were underpriced based on their stability and steadier, profitable operations?

Now ladies and gentlemen; my dearest guests; let’s keep our heads and make a fortune together.

Honestly, after several hundred point days, ripping up and down and all across, this action is just not stimulating.

It’s sort of like this desensitizing action that leaves you unable to look at things clearly. I’m half asleep over here, pushing some papers, crunching some numbers, totally uninterested in the market at this point.

We’re running hot here, and probably need a pullback, unless 20% variance is now to be expected.

Really, the doomsayers club has been out for two to three weeks now, plus they had a decline going for a few more weeks before that. We’ve been in down mode for at least two months, and maybe started it a little before that even.

Bears have literally everything playing into their hands from market action to news feed to idiots in Europe and Asia and America, and surprise elusive growth and more…and they still can’t seem to close the deal.

It’s pathetic.

Let’s just go someplace already.

Alright, I’ve about made my assessment of this market, and I’m ready to make the call:

I still wish to look at the next real correction, so I will hold off until Monday or later to pull the trigger, but for now I’m thinking we’re heading back up.

We were pretty overbought, and due for a correction, so despite CNBC breathing panic about bad German numbers, I’m resistant to get onboard the dread wagon. Meanwhile, our own manufacturing numbers looked fine. We got a big rebound in automotive, and wouldn’t you know our industrial output was level.

Let me repeat that, it was not declining, it was level. After this big down move, it’s hard for me to think there’s too much of the growth story left to break off and cause more pain.

As the whole planet is suddenly on recession watch, I can’t bring myself to get that negative.

Originally, I never thought we’d double dip. I wanted to see a big sell off in oil and commodities (check) and I figured we’d rebound in the second half on lower input costs for businesses on the backs of commodity hoarding homos.

Then the selloff came, much harder than I expected, foreign debt swaps began to blow out, and it was accompanied by some bad employment numbers and I thought “uh oh, I underestimated this; here we go.”

Now, I’m still hesitant to go to long in case a European solution strengthens the dollar overtly, but I also don’t have it in me to start skipping around in a tin foil hat talking about how to ferment nitroglycerin from lawn clippings or make charcoal out of my feces.

I think the prospects are good for a dollar bottom. Despite the breadth of disappointment over the debt ceiling debate, they managed to cut a few trillion with multi-partisan agreement, which is more than anyone thought possible only a few years ago, and it sounds like entitlement reform is still on the table.

So that bodes well for our debt.

Meanwhile, our borrowing costs have never been lower, so on the other side of the debt equation it doesn’t look like we’re getting crushed.

Also a positive for the dollar.

No need to inflate the currency to make up lost ground.

We might see tepid intervention from the Fed if the euro/dollar disparity narrows too much, but overall I think the U.S. days of easing are closed, barring some sort of catastrophe.

And this last breakdown showed that China and Russia were willing to accept that the fate of Europe and America are the shared fate of the East. China let their currency appreciate a bit. Very reassuring; solutions will be formed with cooperation of world powers. Deleveraging will be handled tactfully. Everyone takes a bit; no one is getting swallowed up.

There’s enough bad news coming from the pressing issues of Europe to keep on the lookout for further selloffs. And global growth has been shit on. However, after a 20% downward correction who’s to say those realities aren’t baked in, somewhere? No need to freak out and lock yourself in a panic room.

I want an elevated cash position, but crude oil doesn’t look like it’s going much lower, so UCO is getting covered within the week. I will also sell off some/all of the shares I purchased on this dip, for profits, to raise cash back to where I was going in.