‘Yesterday we worked through the illusion to the reality of the ECB’s
“unlimited” bond purchases, the end result being that we discovered the ECB:
1)
Didn’t announce anything new
2)
Is implementing the same policies it’s tried twice before with no success (see
Greece)
3)
Is implementing policies that neither Spain nor Italy will go for…
And
finally…
4)
Has solved nothing due to the fact that of the two mega-bailout funds, one has
only €65 billion in firepower left and the other has yet to be ratified by
Germany
Today
we turn our attention to the US’s Federal Reserve where the whole world expects
the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.
There
is a small problem of math with this. The Fed currently owns all but
just $650 billion of the outstanding 10-30 year Treasuries. At this point, even
a $200-300 billion QE program would create serious liquidity problems for the
financial system. So scratch that idea off the list.
Of
course, the Fed could potentially implement another agency/MBS QE program. But
that would be a very political move with the Presidential election so
close. This, combined with current food and energy prices, makes it unlikely
the Fed would want to do this: too many consequences with too little to gain
(stocks are at four year highs).
Indeed,
if anything, the Fed is likely to pull a “ECB” move, namely promising something
vague that it actually cannot deliver on. Why would the Fed do this? Because,
like the ECB, the Fed is running out of bullets. Indeed, St Louis Fed
President James Bullard all but admitted this to the Financial Times:
“I am a little – maybe more than a little bit – worried about the future
of central banking,” said
James Bullard, president of the Federal Reserve Bank of St Louis, in a
Financial Times interview at Jackson Hole. “We’ve constantly felt that there
would be light at the end of the tunnel and there’d be an opportunity to
normalise but it’s not really happening so far.”
The
biggest worry on display at Jackson Hole was whether these bureaucrats, sitting
at the heart of every mature economy, still have the power to influence demand
now that interest rates cannot fall much further. Lurking behind many debates
was this question: if central bank policies are so effective, why is
the global economy not growing faster?
http://www.ft.com/intl/cms/s/0/a0e397b6-f8dd-11e1-b4ba-00144feabdc0.html
Here’s
a Fed official, not only openly admitting that Fed policies aren’t working, but
even calling the future of Central Banking into question. Take note: underlying
realities are beginning to be asserted by officials at Central Banks around the
globe. They’re running out of bullets.
So
where does this leave us? Well, it’s highly unlikely the Fed will actually implement
anything major this week. What we could see is a large, but hollow
promise for action, much like the ECB’s promise of “unlimited” bond purchases
based on certain “conditions” being met (an empty promise if ever there was
one).
If
this kind of empty promise is made, look for the market to top soon after.
And
if the Fed fails to deliver this week… buckle up.
On
that note, if you are not preparing for a bloodbath in the markets, now is the
time to do so. The reality is that the Central Banks are fast losing their grip
on the markets. They’ll never admit this publicly, but I can assure you that
Bernanke and pals are scared stiff by what’s happening in the banking system
right now.
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