Fed pulls out the bazooka

We may look back on QE3 as the long-awaited 'beginning of the end' of the great bond bull market.

By Bill_Fleckenstein Sep 21, 2012 1:58PM

© Hisham Ibrahim/Corbis
After months of speculation and anticipation about how many bullets he might have left, Federal Reserve Chairman Ben Bernanke finally pulled out a bazooka.

On Sept. 13, the Federal Open Market Committee released a statement revealing that the Fed was going to buy $40 billion of mortgage-backed securities a month unless job growth doesn't improve, in which case it might buy more.

Thus Bernanke is going to pursue an essentially open-ended program of asset-buying (aka "quantitative easing," or QE) that can become even bolder if he doesn't get the kind of economic performance he wants.

Oh, and by the way, the FOMC also extended its zero-interest-rate policy into 2015 and is going to continue its so-called Operation Twist.

Bennie and the Inkjets

I don't know what other folks expected, but this was about as large a round of QE as Bernanke was liable to pursue. Overall, however, the U.S. stock market response to the Fed announcement has been relatively tame.

While I think it is important not to underestimate what Bernanke has done, people should not blow it out of proportion, either. This is not a direct step to hyperinflation, and it doesn't mean that the value of cash is instantly going to zero. We may get there, but there are going to be a lot of steps in that process.


Always look for subjectivity-verb agreement

What is significant about what the Fed has done is not so much the amount of securities it is buying, but rather what the statement reveals about Bernanke's intentions. He wants the labor market to improve "substantially," and he doesn't feel compelled to cut back on what he is doing until after the economic recovery "strengthens."

That is a lot of subjectivity, meaning he can do what he wants as long as he wants, and that is a powerful statement, I think.

That doesn't mean stocks in general will go up. They could, or they might not. In addition to weak earnings, they are going to have to deal with the fact that interest rates are probably going to rise from somewhere around five years out on the yield curve. Once the bond market has realized that it has more to fear from inflation than to gain from the deflation-scare trade (which I think is essentially over), it may have an impact on stocks, though I wouldn't expect that to happen any time soon.

Then there are the consequences of the election and the so-called fiscal cliff.

Thus, stocks could go anywhere in the next few months.

Initially, they are probably headed higher, though at some point there is likely to be a very nasty sell-off. I don't really want to spend a lot of time thinking about the latter because, as I have been saying for years now, and as has been so aptly demonstrated since the lows of 2009, trying to get short in a money-printing world is a dangerous proposition. (Not that being long is easy, especially when you know how artificial everything is beneath the surface.)


Bonds away!

Given the fact that I feel strongly that a (long-awaited) inflection point for the bond market may be at hand, this week I initiated a small short position in the U.S. 10-year Treasury bond.

From a tactical standpoint my goal was to take advantage of the current bounce in the bond market, but I have no idea if this is going to work (anyone who claims to be sure is delusional).

For one thing, when the Fed is in buying as much paper as it is, it could make it difficult for a bond short to work. On the other hand, the bond market is even bigger than the Fed, so if I'm right about the shift away from deflation psychology, then I could have a winning position for quite some time to come.

At any rate, this is a very modest position, and I have no huge expectations. Thus, I won't hesitate to throw in the towel if I think my timing is not right, but I also probably will add to it if I think it is working, and then figure out how I want to manage my risk along the way.

In summary, I am in essence trying to capture the idea that the bond bull market has ended. But these things take time. I just want to test the market with a bit of a position. While this is the sort of tactic that works for me, no one should follow suit without doing his or her own research and carefully assessing the risks.

As a final note, regarding precious metals (my favorite long idea), and in which I do have a big position, I think the tendency for everyone will be to fight the last battle. So many people were so wounded, shocked and beat up mentally during the gold correction and slaughtering of gold stocks over the past year that they are going to be inclined to sell too soon rather than buy enough and net-net put a bid under the metals complex for some time.

However, if it weren't for the fact that we have an election coming up, which could theoretically upset the macro apple cart in some way, I would say the metals are almost a layup to close 2012 "high and last."


King World News

My latest interview with Eric King was a fun conversation to have and I think readers will really enjoy it. Readers can listen to it here


At the time of publication, Bill Fleckenstein held a short position on 10-year U.S. Treasurys and long positions on gold and silver.


Sep 24, 2012 8:38AM

  All Bernanke is doing is putting the country closer to default. With this plan the Government will own all the bad mortgages instead of the banks. They're yanking his chain again and he obeys.

  What he should do is start breaking up the "To big to fail" banks and push for a reinstatement of Glass-Stiegel.

  I wonder why he thinks this will put more people back to work? The banks aren't going to loan out more money. With the high unemployment all the government is thinking about is how much revenue will be coming in at tax time, to cover all their give away programs, none of which benefit the voters.

Sep 22, 2012 7:28AM

Hi Bill. Grubbers seem really excited about the prospects of more bank debt and more lift for stocks that have nothing to do whatsoever with America or the American economy. They are-- hellbent on being the wealthiest generations ever, just before the lights go out. When you look at the attacks on our Society by grubbers since 1998, you see a pattern. They got theirs and went about burning everthing that could provide for others. You tell me why financiers flourish. They contribute nothing to the good of the nation. They recommended termination of millions of jobs and careers, to offshore those jobs and force a suppression compression recession depression- the likes of which we cannot recover from. We will have to create something altogether new. Likely, in the pickled brain of Inflationists like Bernanke- we will be forced to borrow from them all over again. How about--- NO.

Romney said he wouldn't pass Ben another Term. Obama hasn't said much but I thought it was clever to give Ben 8 years to ensure that a monetary policy like this one was truly terrible. Obama can and likely will eliminate the Federal Reserve next term and dump the Dollar in favor of a newer more useful currency for the whole nation. The globe had about $50 to $60 Trillion in currencies about 15 years ago. It has $1 quadrillion or so in combined currency, fiat currency and debt made to look like yet another currency. The dumbest part is-- all three currency types have no collateral and don't serve the nations of the world, just Central Banks, Member Banks and a fraction of people.

It will only take a handful of key strategic and tactical moves to delink omnipotence from being the deciders of all things. If they can do it with paper, we can shred it. You tell me... which American corporations couldn't be fully flushed of Board Directors and hired-in executives and repurposed back to being an indigenous employer, manufacturer and integral component of a new economy? We STINK with platforms and financial manipulators. Change-out the currency and they return to the cardboard whence they were built from.

Say what you will, but Ben Bernanke sold us out. His banks are fraud. The Gramm Leach Bliley Act has to go, segregation between money touchers restored, wealth made fully financially dashed and New World Order-- trashed. Who will do it? Who won't? Those few will have to come out into the daylight sometime soon, well before Pauxatawny Phil does 2/2/13. You'll see.

Sep 24, 2012 5:55AM

bernanke is going to ruin this country.  This delays the inevitable.  He, along with the democrats, are spending money that we do not have.  Hyper inflation will hit at some time.

Sep 23, 2012 9:21PM
The Fed is "going to buy $40 billion of mortgage-backed securities a month unless job growth doesn't improve . . . ."

You heard it here first folks, The FED creates jobs.

How stupid do these morons think we are?
Sep 24, 2012 5:37AM

There is no free America left. There is no elected government, by the people, for the people . The FED has declared itself emperor and taken over. It prints money, puts us further in debt and has to answer to no citizen, to no State to no one.

This is the end. We have become a nation of sheep and indentured servants to the will of the FED.

The pain that is coming will make even the richest amoung us tremble with fear.

Sep 23, 2012 7:19PM
The truth is 40 billion a month Mortgage back securities purchased by the Federal reserve !!!Money out of thin air !!! They have no money !!! Then they pay the Banks this 40 billion a month who are the holders of  these mortgage back securities !! The Banks then take this money and buy Treasuries !!! The federal reserve takes these securities and bets them in the Derivative market getting a 9 - 1 hedge every $100,000 in mortgage means they can bet  $900,000 in Derivative market  !!!!! The end game is Federal Reserve owns all the Mortgages and every piece of land, all the homes Then devalues the Currency even further where you cant pay your mortgage because utilities and food will be unaffordable so they will FORECLOSE on your home and WA-LA They will rent it back to you !!! Thats the New World order and Nationalized Housing all done with make believe money !!!!  WAKE UP SHEEPLE !!!
Sep 23, 2012 5:49PM
I have to laugh when the media uses the term "economic recovery" to describe the state of our economy. The blatant manipulation of key economic and employment indicators is coming back to roost. You can fool some of the people some of the time, but not all of the people all of the time. People and politicians can argue over who's to blame and who should be punished and pay more or less, but the truth of the matter is, if  we don't figure out a way to turn our trade deficit into a surplus, we will be trying to build on a foundation of sand. An economy built on negative wealth and borrowing does not work. Shifting of wealth and jobs to our trading, so called, partners in the name of globalization, above anything else is leading to our demise.
Sep 24, 2012 9:52AM
Bernanke is protecting the banking industry. He doesn't give a damn about employment. Bernanke and the federal reserve board know that this so called stimulus will not create employment. This has been the case with TARP and federal reserve all along. Their real gold is to transfer bad banking mortgages to the US taxpayer. Save the banking industry, to hell with the American people!!! Europe is also trying to do the same thing.
Sep 24, 2012 10:13AM
STOP HANDING OUT MONEY!!!  Some of us saved and are doing OK.  This is only raising the cost of living but no ones paycheck is going up!
Sep 23, 2012 3:03AM

Bernanke is trying to shift money from bonds to equities but the last two rounds of QE didn't get people bellied up to the bar for his kool aid, either. Instead, they are readying for inflation  buying gold and silver.

There is a lack of trust in the Feds manipulation and strategy. People are still smarting from  the memory of the crash , and contrary to what the financial services industry wants you to believe, most 401 accounts have not recovered. Money was pulled out, and jobs with future contributers are gone.

The boomers closer to retirement are preserving capital accepting low bond and bank returns, rather than facing another 60% hit.. Young people are mired in student loan debt and working reduced hours, leaving little to sock away.

Fear rules, wealth is on the sidelines. Cash is king when returns are almost nil. Bernanke's done what he can, now the politicians have to act on the policy side. The election outlook is promising more gridlock.

Pull up the recliner, make some popcorn. This movie is still gonna last awhile.


Sep 24, 2012 9:13AM
Bernanke is trying to save his job.  Romney said he'd fire Bernanke.  
Sep 24, 2012 9:11AM
Feds Pull The Rug Out From Under. Their are limited amounts of time the feds can keep doing damage to the dollar. Higher wages are needed to keep up with inflation and business cannot afford them. Only those who are government funded by tax payers get the advantage Those in government with their get rich quick insider trading and false economy wiil go down with the ship too. Only the chosen few benefit from the feds moves. Teachers depend on income from increased taxes to support raises. The social advancement high school graduates are a joke. Lying is too common and justice for all if you have money is the truth. Too bad America is slipping away into the very things that was hated by our revolutionary war founders.
Sep 24, 2012 3:55AM
I think he's right in the sense that markets are so artificial that it's almost impossible to know for sure what will happen.  I think it is dangerous for the government to manipulate markets as it changes behavior in unforeseen ways.  There will be unintended consequences.
Sep 24, 2012 8:51AM
"Fed pulls out the bazooka"

The question is, where will they point it???????

I've got some ideas for them!
Sep 23, 2012 9:40PM
Geez, all these QE's, I am starting to think the goose that laid the golden egg is gone, and has been replaced by moron's. Of course all these companies ie. GM, AIG, and all these great green energy companies that we put our tax dollars were too big to fail, yet they do. Now my only question is if all these companies were to big to fail, let's talk about the United States, are we to big to fail? Who's gonna save our a-s. I believe as one President said,"The Buck Stops Here". so why then didn't we learn from him? Oh sorry, because of our debt, we ARE owned by China, Russia(?ain't sure yet?), the Euro I think, for sure England(amount not sure). Damn we used to pay our own way, what happened? Outside of a lot of congress people eating bacon for their districts, all 3 branches of the the government should be impeached, regardless if their Dem or Rep. This has got too stupid and needs to be stopped. My apologizes  to the Muslim Brotherhood, think you'll be faster than I think, don't like being beheaded because I'm a sex crazed drunk, so make it quick OK. Thanx
Sep 23, 2012 6:49PM

I believe that Ben launched QE3 to save his own job. Romney has promised not to reappoint Ben if he is elected. I am voting Romney/Ryan.

Sep 24, 2012 8:36AM
Bill knows that this has been done many times in the past w/out hyperinflation? wrong main stream media is the propaganda machine that calms the masses into false sense of security. Google hyperinflation for Zimbabwe it took 2 years to make the currency worthless. There's a call to replace the US dollar for oil trading. Guess what? thats all thats holding up the dollar. Everything you saved is of 0% value.
Sep 24, 2012 10:53AM
Financials are doomed to another bubble caused by this decepticon maneuver by the Fed. They are prompting up the very thing that got us here in the first place, extremely low interests rates, cheap credit and mortgage backed securities. It's freaking deja-vu all over again. Where do these people come from? Is this real or am I in the episode of an old twilight zone show.
Sep 23, 2012 5:06PM
What bullets are left?  There are so many non-fringe, mainstream respected economists predicting major collapse at some point from decades of kick-the-can down the road economic policies that it is enough to scare one into hoarding and stockpiling food.

We've all been sold out by thieving, greedy money interests and the politicians they own.

Sep 23, 2012 9:19PM

"Overall, however, the U.S. stock market response to the Fed announcement has been relatively tame."


Yeah, tame and short-lived.

The Wall Street's response to QE3 wore off in about a day, like a cheap heroin high.

You wait. Wall Street will be back in no time, looking for another hit, a QE4. 

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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