Sunday, May 25, 2014

The Mantra on Wall Street Is ‘Don’t Fight the Fed’, but Do You Know What the Fed Is Doing? And Where Did Belgium Get $141 Billion to Purchase U.S. Treasury Bonds?

The main mantra on Wall Street is ‘Don’t Fight the Fed’, implying that if monetary policy is geared towards easing – lowering of interest rates - then riskier markets are the game in town, and if monetary policy is geared towards tightening – rising interest rates – then volatile markets are to be avoided. But do we know what the Fed is up to?

I. DOW, S&P 500, QE, and Tapering

Both the DOW and S&P 500 are sitting at all-time highs. Since bottoming out in early March 2009 (DOW, S&P 500), the DOW is up approximately 150% and the S&P 500 approximately 180%. Astronomical returns no matter what period you compare this to.

It’s no secret that the only reason the markets have been soaring is because of unlimited quantitative easing [QE], i.e., stimulus, stimulus, and indefinite-stimulus - “fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy.”

By December 2012, funds were being pumped into the markets to the tune of $85 billion a month - a last resort, desperate measure that the FOMC began so that their ‘growth’ targets could be met. This was tapered down to $65 billion a month in June 2013, which resulted in a major sell off in the markets - “the stock markets dropped approximately 4.3% over the three trading days” - prompting the Fed to “hold off on scaling back its bond-buying program”, underscoring the fact that the Fed still has Wall Street’s back and is still in the business of transferring wealth from Main Street to Wall Street.

click to enlarge - source

After the initial shock that ‘free’ money was going to be less readily available subsided and the markets stabilized, the tapering continued; “after three additional reductions, the program currently stands at $45 billion per month. Fed Chairman Janet Yellen expects the program to wind down steadily through 2014 and conclude by year-end, assuming the economy remains healthy.”
The FOMC will likely continue to taper the pace of its asset purchases by a further $10 billion — split equally between Treasuries and mortgage-backed securities — as hinted at in Chairman Bernanke’s press conference following the December meeting. While the Committee has taken pains to note that the path of asset purchases is 'not on a preset course,' a substantial change in the outlook would likely be required for the Fed to either pause or accelerate the gradual pace of tapering started at the last meeting. We think this relatively high bar has not been met, some weaker recent data notwithstanding. Based on a roughly $10 billion per meeting tapering schedule, the last QE3 purchases should occur in October 2014.”

II. The Fed and Belgium

But all is not as it appears. According to Paul Craig Roberts and Dave Kranzler, “The Fed Is The Great Deceiver” - it has not been tapering, but pumping more funds into the markets than ever before.

The Fed has been laundering money into the markets through third parties, Belgium being the primary one:
“Further analysis of the source of funds to finance the U.S. deficit shows Belgium and the Fed are the only two buyers on the margin currently driving rates lower…

“The strange aspect of the data is that in the published figures, the tiny country of Belgium with a GDP of only $509B, somehow managed to purchase $40.2B in Treasury securities in the month of March. The purchases follow a six-month barrage of purchases by Belgium in which $214.6B in Treasuries were added to security accounts held in the country. Based on the data, Belgium has escalated to third, behind only Japan and China (mainland) in the rankings of foreign countries which hold the most U.S. Treasury reserves.”
click to enlarge - source

In a three month period, from November 2013 through January 2014, Belgium, with a GDP of only $484 billion, miraculously acquired enough funds to purchase $141.2 billion of U.S. Treasury bonds. As Roberts and Kranzler point out:
“Is the Fed ‘tapering’? Did the Fed really cut its bond purchases during the three month period November 2013 through January 2014? Apparently not if foreign holders of Treasuries are unloading them.

“From November 2013 through January 2014 Belgium with a GDP of $480 billion purchased $141.2 billion of US Treasury bonds. Somehow Belgium came up with enough money to allocate during a 3-month period 29 percent of its annual GDP to the purchase of US Treasury bonds.

“Certainly Belgium did not have a budget surplus of $141.2 billion. Was Belgium running a trade surplus during a 3-month period equal to 29 percent of Belgium GDP?

“No, Belgium’s trade and current accounts are in deficit.

“Did Belgium’s central bank print $141.2 billion worth of euros in order to make the purchase?

“No, Belgium is a member of the euro system, and its central bank cannot increase the money supply.

“So where did the $141.2 billion come from?

“There is only one source. The money came from the US Federal Reserve, and the purchase was laundered through Belgium in order to hide the fact that actual Federal Reserve bond purchases during November 2013 through January 2014 were $112 billion per month.

“In other words, during those 3 months there was a sharp rise in bond purchases by the Fed. The Fed’s actual bond purchases for those three months are $27 billion per month above the original $85 billion monthly purchase and $47 billion above the official $65 billion monthly purchase at that time.”

Dr. Paul Craig Roberts: Fed Laundering Treasury Bonds in Belgium, Real GDP was Negative & More

III. What’s Going On?

Paul Craig Roberts explains in his article and the video above why the Fed is working off the books to prop up the markets. The gist of it is that the U.S. economy is not as rosy as the government claims it to be, and that the U.S. dollar is not a safe haven anymore.

So Wall Street’s mantra of not fighting the Fed is a little confusing. If you believe the official statements about QE and tapering, then you should be concerned about a market downturn with the taps turning off. If you know what’s going on behind the scenes, that the Fed is more worried about the economy and the U.S. dollar than ever before, pumping more funds into the markets than at any other time in history, then you might want to take advantage of more ‘free’ money and be inclined to go long.

As for me, as I have stated in the past, with boomers cashing out, inflation on the rise, margin debt at a record high, trading-revenue dropping across-the-board, U.S. technology companies being in trouble, the game at play being the business of war, and a few other reasons, I’m short the market.

1 comment:

  1. The US 10 Year And The Belgian Connection - "It may not be coincidental that the Belgian buying began in earnest just as the tapering got underway. Something may in fact be rotten, and it's not in Denmark...but several hundred kilometers to the southwest.

    "Rather than looking to explain the unusual spike in Belgian coffers, most market watchers are fixated by recent comments by Mario Draghi that the ECB is poised to launch a quantitative easing-style bond buying campaign in order to weaken the euro and to push up inflation in Europe. If that is the case, how long could the ECB be expected to fight a two-front monetary war...carrying water for the Fed while buying European bonds simultaneously? We must expect that any clandestine campaign by the Europeans to support Treasuries will have a brief shelf life, which could get even briefer if the ECB initiates their own QE.

    "It is a testament to the bovine nature of our financial media that this story is not being pursued strongly by all the power the fifth estate can muster. But who cares when rates are low and stock prices high? Have another chocolate. The Belgian ones are the best."