Tuesday, August 10, 2010

The Fed saves the day...

So, the computers seemed to be happy with the Fed's decision to do another round of asset purchases (the term Quantitative Easing Lite seems to be the most popular on the web right now). Roughly, $200 billion will be pumped into the system in the hopes of increasing the flow of capital. As another person commented, when the only tool you have is a hammer every problem looks like a nail. The Fed's only tool is more QE so that's what they are going to do.

There had been talk that this program would be substantially larger - numbers that started with T had been floated - so I'll be interested to see what Wall Street's reaction will be.

However, here's what keeps me up late at night.... When someone needs to sell some US debt (maybe China, maybe Japan). Remember the Fed has been buying up piles of mortgage debt from the banks to keep them afloat. The banks then take that cash to buy US Treasuries so the government can keep financing it's stimulus efforts. I know it sounds like a pyramid scheme but trust me this is legit ;) If someone start selling US Treasuries, well Houston we have a problem. Someone will have to buy those Treasuries to prop up their value - now the Fed can step in and buy up Treasuries. Wash, Rinse, Repeat.

If people are paying attention this could be the Holy S^#^! moment for the markets when people all race to the exits from US Treasuries. This is still a low probability event, but it should be on your radar.

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Today's headlines:

* Index of Small Business Optimism lost 0.9 points in July following a sharp decline in June. The persistence of Index readings below 90 is unprecedented in survey history. The frequency of reported capital outlays over the past six months fell one point to 45 percent of all firms, one point above the 35 year record low.

* Container shipping volumes dipped and could signal a retail slowdown.

*Congress authorized $26 billion to states to soften the blow of falling state revenues. This will offset a portion of the second half slowdown that I was expecting.

* For all of the good Google does, their CEO scares me sometimes. Today's comments won't change my opinion.

"No anonymity is the future of web in the opinion of Google's CEO Eric Schmidt. Schmidt's message was that anonymity is a dangerous thing and governments will demand an end to it."

Cheers!

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