Notes From Underground: A Very Slow news Weekend Unless You Are in the Middle East

The markets have been given a modicum of quiet as all ears turn  to this week’s FOMC meeting. It seems that the FOMC release will be at 11:30 a.m. CST, which is an hour and forty-five minutes earlier than usual and the Bernanke meeting with the press will begin at 1:15 p.m. CST. A great deal of importance is being place on this historic first press conference. Much is also being made about the end of QE2 but I am not one of those looking for wild action when the FED stops buying Treasury debt. It seems that the FED may not announce “new” purchases but it doesn’t mean that they won’t be rolling over expiring issues and purchasing other debt in the market with the rolled over money.

Also, the previous efforts to halt a quantitative ease last April had a far different environment to deal with. The U.S. unemployment data still showed job losses and the EUROPEAN DEBT situation was on the boil, causing the FED to be very cautious about the threat of a deflationary spiral. The FED still has many things to worry about. If the U.S. Treasury market stabilizes at the present levels it will be an indication to the FED that they have been “successful” in the QE2 program. If however the long rates begin to head higher over concerns about rising inflation in the U.S. and/or grave concerns about the U.S.BUDGET, then the FED is going to be in a far more difficult situation.

There was a very good piece on ZERO HEDGE last week detailing out the great amount of leverage the FED has utilized in its QE programs. It is an interesting analysis about the potential box that the FED may find itself. Everyone analyst from PIMCO on knows the U.S. profligacy is a headwind of major proportions and yet the BOND market continues to hold or rally. The big question of course is why? Oil is up. Food prices are higher and, of course, precious metals are signaling the global fear over DOLLAR DEBASEMENT and yet the DEBT markets hold. Can the BONDS’ ability to defy the fundamentals merely be the result of FED PURCHASES? This will be of major interest to all traders and investors and the answer will not be found at Bernanke’s news conference.

It will take more time to analyze just what is driving the BOND market as the fundamentals are so overwhelmingly negative. As I have often warned, when the Japanese situation deteriorated in the 1990s many JGB traders put on huge short positions as the BOJ and MOF threw so much liquidity and fiscal debt at the economy. Time after time the JGBs rallied, defying the apparent market fundamentals. Is the U.S. equivalent to Japan? I do not believe so for the Japanese were able to draw off the huge pool of savings they had accumulated during the high growth periods. The U.S. started with a high level of debt as the great period of de-leveraging began and that may well be the most important difference as to what happens post-QE2. Oh well, so it goes … in a very unbalanced world where 2+2=5.

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3 Responses to “Notes From Underground: A Very Slow news Weekend Unless You Are in the Middle East”

  1. alan walser Says:

    Need more posts of your thoughts on US Bonds, Yra.

  2. Danny Says:

    If there is an absence of significant volatility in the market (particularly commodities) doesn’t that imply that pretty much every market analyst, who have been arguing on a daily basis for the past several months that QE2 has created significant price distortions particularly in the commodity space, has been crying wolf for far too long.

    I guess I just wonder how it is that the Fed can only have a one way impact on market prices? It only seems intuitive to me that IF present day commodity prices can legitimately be attributed to QE2 THEN when QE2 ends there should naturally be a spike in volatility as well as downward pressures on price-to the approximate extent that the Fed was causing lower volatility and upward moving prices through QE2.

    How do you reconcile this?


  3. yra Says:

    Danny–zero based interest rates are also a policy regardless of QE2–yes commodities will become more volatile as they sift thru the Fed’s policy and of course the budget–think back to March of 2008 and look at the charts from march 18th when the FED did not cut rates as much as the markets anticipated and wanted

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