Obviously my call (at least so far) that the consensus view would face challenges hasn’t worked out at least in terms of headlines. The blow back from this week’s central bank bubble is quite another story and should arrive soon enough. Ben thinks every thing he does is a positive sum game. In reality it is nothing more than a trickle up transfer of wealth from the poor, middle class and savers to his crony kleptocrat friends. Friends of Ben are powerful which is why this game has persists. Surveys already were suggesting prices paid were increasing. The Fed has decided to cross the redline and into dangerous ground, launching QE3 with open-ended (but using the words “conditional”) security purchases — “agency mortgage-backed securities at a pace of $40 billion per month”. Per Sober Look, “The MBS purchases the Fed has promised today will result in taking out medium to shorter duration paper out of the market.” The Fed might well take over the mortgage market, as about all that is left for traditional banking is origination. The Fed will purchase about 56% of all issuance. This is adding more inflated poor quality assets to the Fed’s portfolio. This is monetization pure and simple. Repeating what UBS said about this last week.
The alternative of tilting purchases toward MBS implies that the QE program would need to be quite protracted. Monthly supply of conventional 15yr, 30yr and 30yr GNMA has averaged about $85-90 billion over the past year and the Fed is already buying about $25 billion. The Fed might be able to buy another $40 billion without disrupting the market. Assuming that the Fed does a $600 billion program with 75% in MBS, it would need to buy $450 billion in mortgages, so in our estimation the program would need to last nearly a year.
UBS conclusion: We doubt the market would respond well to that prescription from Dr. Bernanke.
The inflation expectations market rendered its verdict after the so called “open ended” Fed move. TIPS spreads are starting to look parabolic. The market is pricing in rising inflation and there is only so much negative real yield investors will tolerate. Consumer inflation expectations for August will be reported early next week, and can’t be pretty. Now September will be baked in.
Source: Sober Look
Sober Look also has a revealing article about desperate conditions in Iran. Leaders painted into a corner tend to do desperate things. Is Iran behind riots taking place throughout the Middle East? Iran doesn’t have the clout in Sunni regions like Egypt and Libya, but hired guns are another story. Iran can influence Shia areas like Iraq. The assassination of the US Ambassador to Libya looked like a planned professional job. Al Quada is mentioned as the culprit.
Global food inflation even before the effect of the drought is felt. Are the riots in the Middle East just a coincidence? The last spike in 2011 corresponded with the so called Arab Spring.
About The Author - Russ Winter is a veteran investor, financial writer, world traveler, and he blogs at Winter Watch. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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