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10.19.2014 Financial Intelligence Report Bookmark

Will They Do More QE?

Pull up a chair and let’s chat folks.  This is going to be an interesting letter on a lot of levels, so let’s get started.

Everyone that has any interest in finance knows that the Federal Reserve has had a program in place called Quantitative Easing for the past 5 years. For those of you who don’t understand what it is, the basics are that the Fed’s have printed up money and then used that money to buy Treasuries from the Government and to soak up toxic assets like bad mortgages from the banks. In doing so, it has had the effect of constantly lowering interest rates, since they don’t have to raise rates to “lure” folks into buying the T bills. The Fed’s would buy them at any price, and any rate of return.

But the offshoot of QE was that because they were buying up toxic crap from the banks, AND because Treasuries are also bought from the “primary dealers” ( the big banks) the banks got tons and tons of money to go play cowboy in the asset markets. With virtually zero percent money for the big companies to borrow and buy back their own stock, and all the bank money sloshing around, we’ve had the best bull market that fake money can buy. Stocks are up gigantically since the beginning of the program.
Will They Do More QE?

Pull up a chair and let’s chat folks.  This is going to be an interesting letter on a lot of levels, so let’s get started.

Everyone that has any interest in finance knows that the Federal Reserve has had a program in place called Quantitative Easing for the past 5 years. For those of you who don’t understand what it is, the basics are that the Fed’s have printed up money and then used that money to buy Treasuries from the Government and to soak up toxic assets like bad mortgages from the banks. In doing so, it has had the effect of constantly lowering interest rates, since they don’t have to raise rates to “lure” folks into buying the T bills. The Fed’s would buy them at any price, and any rate of return.

But the offshoot of QE was that because they were buying up toxic crap from the banks, AND because Treasuries are also bought from the “primary dealers” ( the big banks) the banks got tons and tons of money to go play cowboy in the asset markets. With virtually zero percent money for the big companies to borrow and buy back their own stock, and all the bank money sloshing around, we’ve had the best bull market that fake money can buy. Stocks are up gigantically since the beginning of the program.

But each time that a QE program was coming to an end, the market would fall. We’ve had QE1, QE2, the “twist” ( another name for more QE) and QE 3. Each time a program ended the market would fall like a rock and the fed’s would come out with another program. Well, this current QE3 is to end this month. If you look at the market’s action over the last couple weeks you see we finally peeled off a 10% correction, the first one in over 3 years.  That has everyone screaming for more QE and even got fed head Bullard to say “maybe the Fed’s should delay ending QE”.

That comment marked a Vee shaped bounce off the bottom of the recent pull back. Just the “talk” that more free money might be coming at them got them so excited;  that from his statement on Thursday, to noon on Friday the DOW bounced 470 points.  But here’s the question…is more QE coming?

It is no surprise that the last 5 years of QE has not solved any problems. Jobs are non existent or at best they’re part time with no bennies. Housing is still in the pits. The supposed renaissance in manufacturing sputtered out. Inflation is out of control in food, medical, insurance, electric, recreation, etc. All in all, the only thing QE did was get the banks flush with cash and inflate the stock market. The “economy” is still hovering near the toilet.

So the question is this…Are the Fed’s going to come in and do more QE or not?  The answer might surprise you, because if I’m right, it is NO. I realize that flies in the face of all the big name conspiracy guys, and it flies in the face of most people connected with Wall Street. The common thinking is that if the market fades, they’ll rush in with more QE to save it. I happen to think that’s wrong. Let’s see why I’ve been on the other side of this thing….

The idea behind QE is to get rates low, right? Right. Well, for years they were printing and pumping 85 billion a month into the system to buy up assets. That brought rates down in a big way, to historic lows. But, since November of last year the Fed’s began “tapering” the QE. In other words, cutting the amount of money they were going to use to purchase these assets. So, from 85 billion to 75, to 65 and on until now in October where they have their last 15 billion left to spend. Yet what happened to rates this year?  THEY FELL.  Read that again, it is important. They were removing the buying power, but rates continued to fall.

Why was that? If the purpose of using 85 billion a month was to push rates down, didn’t it make sense that if they cut the spending, rates would rise? See that’s what the main stream thought. Everyone was screaming last year that rates would rise. But guess what? We didn’t. We said rates would NOT rise. Now what made us look like we were so smart?  Easy, once you know how rigged this game is, you can look for the man behind the curtain easier.

I’ve said a zillion times that markets are like heroin addicts. They need ever bigger injections of juice to maintain the same high. Well in the depraved world of Wall Street, the high comes from leverage, derivatives, counter party swaps and a host of other exotic sounding junk. So what happened was that to keep the Wall Street party alive, the banks themselves started buying up Treasuries. Why? To use as collateral to make these outrageous trades and keep their wheels oiled.

The world is immersed in 700 trillion worth of derivatives. Just a few years ago that number was 500 trillion and in the start of 2000, just 70 trillion. Do you notice the exponential growth of these toxic time bombs? Well they need a collateral, a “base” from which to sell these 3rd party products against. So right now there’s literally a SHORTAGE of treasury paper out there. The banks are so greedy to take in Treasuries and then leverage them up through derivatives that the Fed’s DO NOT NEED TO BUY ANY.  Did you follow that? The Feds can stop QE in its tracks and rates will not surge higher, because the banks are taking the place of the Feds and buying up the T bills.

So, if the Fed’s were to come back to the trough and restart QE, what would their excuse be? Are they really willing to just come out and say “we didn’t like to see stocks going down so we’re going to goose the market??”  I think not. They have almost zero credibility now, and enough people around the world hate the US Dollar and Fed as it is. That would be a horrible confession that the Fed’s rig the market.

My theory is pretty basic folks.  The Fed’s have gone out of their way to lie about how good the economy is. Just two weeks ago they were talking about hiking interest rates “sooner rather than later”. Yet they knew the economy is not as healthy as they say. So why then were they tapering the QE program right in the face of weakening economic reports? That’s never been done before, yet they were doing it. I think it was their poker face. Their bluff. They wanted to spread the propaganda that the economy was recovering just fine, and they had “mission accomplished” their job.

But there’s another reason I don’t think we’ll see QE. I think the Fed’s are criminal. I think Bernanke took a powder before this all blows to hell. But I do NOT think they’re stupid. They know the debts are too big, they know the economy isn’t fixed, and they know QE won’t solve it. So while in the past the common move for any central bank was to print and print and print until the whole economy collapsed, do you think they don’t know this? They do. Do the Fed’s want to be blamed for blowing up the financial system? NO. In all of history, you see bankers blow up economies and countries, but you never see them take the blame. It’s always “someone else’s fault”.

Now this is where most folks will think I’ve lost my last marble, but from where I stand, I’m still convinced the Fed’s are looking with all their might for that “excuse” they can blame our lousy economy on. In other words, yeah, they’ll rush to the rescue us again, but not until something really newsworthy shakes the economy and the markets.  

This is ( in my opinion) why they tried so hard to get Putin to engage in a hot war over Ukraine. They poked that guy in the face with a stick over and over, from blaming him for the airliner that was downed to placing crushing sanctions on him. He didn’t bite. But if we did get into a war, one that could possibly go nuclear, it would have been the perfect “excuse” the Fed’s could have used for the failed economy. As I’ve said before you can almost hear the headlines “hey we were doing just fine and the economy recovering perfectly until the Russians started that war…..”  

Well war didn’t start. Now we’ve got this Ebola thing. I have huge problems with this whole situation. I don’t want to sound like the ultimate conspiracy nut, but this story has too many holes in it. We haven’t shut the border, we let air travel continue, we transport infected folks to our country, we’re told it can’t be transmitted through the air, while it’s been proven it does on cough and sneeze particles, etc. It’s almost like they WANT a panic here. A panic that they could then blame the woes on.  

My bottom line is pretty simple. The bankers have always “ruled the world” so to speak. But they never ever want to look bad. I think they’ve played the “economy is doing fine” thing because they’ve just been waiting for the right crisis to come along to blame everything on. And there’s no shortage of “hotspots” that a crisis could come from. We’re still fighting ISIS, and they could come up with a suitcase nuke or send an ebola infected plane into a big city. We’re still sanctioning Russia and Russia is pushing back, in fact just Friday mentioning that they’ll shut the gas off to Europe is Ukraine steals any. We’ve got China and Vietnam bumping heads in the South China Sea. Members of the European Union want out. There’s lots of events that could explode and be the perfect excuse for the Fed’s to come back with stimulus.

I don’t think a new round of QE or stimulus is coming from the Feds UNTIL something ugly hits and the market seriously falls. A 10% correction isn’t going to drag them back to the table. No, we need something larger and deeper. And I think they’re praying it happens. Whether that’s a hot war, a dirty nuke, an Ebola outbreak, or something that they can blame the economy’s ills on. I also think that if they can’t find one, they’ll “manufacture one”.

I know that all sounds crazy. I know that goes against what most intelligent folks say the Fed’s will do. But I sounded mighty damned crazy when they started cutting QE and I said rates would NOT rise. I don’t think there was 5 people that follow the financial game in the entire country that said rates would remain low or even fall.  Well we did.

Sure I could be wrong and they run back to the market with their punchbowl filled to the brim with more easy money. Certainly that could happen. That’s what most people expect. I just don’t think that’s their plan. They have no credibility in the world now, and showing that they’re slaves to the market won’t help their image. No, I think they’ll stand on the “recovery is great” platform and pray for an event they can blame. Then they’ll rush in with all kinds of money printing.  Remember they always want to look like the savior, never the goat.

The Market…

The other day I asked….”Seasick yet?”  Well if you were then because of all the up and down whipsaw action, you must really be green around the gills now.  Until Friday, the DOW had fallen for 6 days in a row, wiping out something like a thousand points. Then because of some Dovish talk out of the Fed heads, the market smelled more free money coming their way and they bounced us for over 260 points.  It has been a wild ride for sure.

Now of course everyone wants to know if the selling is over. The case for saying yes is pretty strong. We haven’t had a 10% correction in 3 years and we just got one. The Fed’s are “talking” about keeping QE in place longer. It is the perfect recipe for the market to just climb back up to the highs.

But we’re not convinced. While we were terribly overdue for a bounce, since nothing goes straight up or straight down for ever, we see it as a bounce right now, and not much more. In fact we were a bit surprised it waited all the way until Friday to appear, we figured it might happen earlier in the week. But it did finally show up and for a day everyone started to feel better.

Our guess is that this bounce runs a few days and then Peter’s out. I tend to think we’ll end up testing the recent lows again. Why? Well all the talk about more QE is just that. Talk. Sort of like Mario Draghi in Europe talking about a big QE program that gets everyone excited, but the QE never shows up. I think we’re going to see the same situation here. If you read my commentary above, you know that I think the Fed’s are looking for a really good “excuse” to come back, and right now they just don’t have one. A 10% correction isn’t going to do it.

If you’re “nimble” meaning you can move in and out fairly quickly, then there’s probably a few long side trades you can grab for a quick move. But I wouldn’t overstay your welcome.  Facebook comes to mind. They had a nice snap back Friday, and closed a few cents above their 50 day moving average. If it gets up and over say 76.00 and the market isn’t puking, they’ll probably run a bit.

But I wouldn’t be shopping for long term holds just yet. Let’s see if this shakes down again after this flurry higher. There’s a lot of plates in the air right now and nothing has been fixed. So let’s not jump the gun only to get things thrown back in our face. If this ends up being more than just a bounce, we’ll have lots of time to grab some runners.  Have a great Weekend folks. We’ll see you on Wednesday.




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