STOCK MARKET WATCH - Tuesday, 31 January 2012

[Demeter]

43. Entering the Debt Dimension

http://www.zerohedge.com/contributed/entering-debt-dimension

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We ended last week’s newsletter explaining why we were not betting on an announcement for more quantitative easing by the Fed, although “consensus” economists claimed to be. We argued that additional QE was unlikely, citing our friends (Bruce Krasting, Lee Adler of the Wall Street Examiner, and Jon Hilsenrath - with his direct line to Bernanke). This week, those expecting easing were disappointed; there was no mention of launching any new program for large-scale asset purchases.

But the Fed did extend the period it anticipates keeping interest rates at or near zero percent (ZIRP). (See Wednesday’s press release here) The Fed also plans to continue its program to extend the average maturity of its holdings of securities, Operation Twist, and to maintain its policy of reinvesting principal payments from its existing holdings, including mortgage-backed and Treasury securities. It is currently holding nearly $3Tn in total assets. The returns from those assets are significant, and the Fed’s balance sheet is continuing to grow even after the end of its asset purchase programs.

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In response, Bill Gross (co-chief investment officer of PIMCO) tweeted that this announcement was the equivalent of “QE 2.5,” while Bruce Krasting wrote,

“Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal. It’s ‘full speed ahead’ according to the Chairman. He's pushed things off until 2014 - a very long time from now.” Bruce goes on to explain the major flaw in Bernanke’s reasoning, and how this decision has made him “a slave to a single dopey statistic.” (Bernanke Goes All In)

Phil wrote,

“The Central Bank's pronouncements came after a two-day policy meeting from which officials emerged still frustrated at the economy’s slow pace of growth, and a bit more confident that inflation is settling down after climbing last year. Fed Chairman Ben Bernanke signaled in a news conference after the meeting that the combination of persistent slow growth and low inflation, could give the Fed leeway to take more action to support the economy, though he didn't commit to it.”

In Jesse's (of Jesse’s Cafe Americain) words:

“This statement shows a longer term commitment to de facto QE at least. The Fed does not need to further expand its balance sheet just yet, but rather deploy those funds strategically while engaging in swaps with other central banks to counter the financial risks globally.

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“I suspect that before they formally announce a further expansion of their balance sheet, the Fed will go 'off-balance sheet' in the easing as financial firms are often wont to do when engaging in opaque accounting. The swaps and noncompetitive bidding for balance sheet assets may be a part of this.

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“I do not object to stimulus per se, but rather this type of blunt policy that does not address or repair the problems that led to the financial bubble and collapse in the first place.”

In Jesse's view, and we agree, the “yawning gap between productive labor and mere money manipulation” needs to be closed, and hard choices are required to resolve the unsustainable concentration of both power and risk.

“Demagoguery and deception in support of the status quo seems to be the rule of the day in the financial sector and its associated professions and exclusive clubs.

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“Therefore self-regulation, restraint, and reform are a thin bet to say the least. The crisis is more like to continue to expand, and the taint of corruption and crime continue to spread.” (FOMC Statement - Targets 2% Inflation - Highly Accommodative Monetary Policy Until ‘Late 2014’)

One problem with large, public programs such as QE2 is that everyone jumps into the same side of the trade, e.g., going long equites in the famous “Tepper Put” that dominated the markets while QE2 was operating (buy stocks, you can’t lose). Using more low-key, less blatant ways of injecting liquidity into the financial system, Bernanke is continuing to provide stimulus while pretending to be an inflation hawk.

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