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 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 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 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 2:46AM
Sounds like time to help the economy for the election!
Sep 24, 2012 12:48AM
It would be nice if Congress decided to actually work with the President and legislate and compromise and try to get something done, rather than just draw a line in the sand and say "tax cuts only."

The low dollar is beneficial for US manufacturing and exports.  I live in China now and though salaries are incredibly low compared to the US, the language, business compliance, and quality issues all favor the US.  

Also, pollution problems are becoming more and more pressing.  We need to support US companies that do things that deal with these kinds of deepening global problems, not just give tax cuts to oil companies and de-regulate financial companies.  These things happen because the latter two types of companies have more money to spend on influencing politicians.  But for long term economic growth, we need to invest in sustainable industries that the world needs.
Sep 23, 2012 11:00PM

Real stimulus for Wall Street and the TBTF Banks.


Hope stimulus for the rest of us.


That's all it is. That's all it can be.

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 9:30PM
The criminal shyster banksters and politicians, Wall Street, the corporate oligarchy, and the powers that be will destroy the gold markets before they will let the little person, the small person, the nobody make any money off gold. The real value of gold is reserved for them and them only.
Sep 23, 2012 9:27PM
Oh, and about the this "Fiscal Cliff" thing. Don't you think that if there was some problem, some fiscal cliff or something, that somebody would have done something about it by now?

This whole "fiscal cliff" thing must just be another scare tactic by Wall Street to extort QE4 out of the FED.

I mean, come on! The govnerment just left for vacation. Everything is fine. The government wouldn't take off on vacation if the country was in real trouble would they?
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 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. 

Sep 23, 2012 9:14PM
Ben Bernanke is shooting blanks. And I don't just mean in bed.
Sep 23, 2012 9:13PM

"FED pulls out the bazooka."


Yeah, Bazooka Joe Bubble Gum.


Who writes this crap?

Sep 23, 2012 9:03PM

Mr. Fleckenstein will either abandon or enhance his position in the stock market.

In short he has no clue, and has communicated nothing of any use.

Sep 23, 2012 8:54PM

Obamacare hurts small business and medicare.

Middleeast perceives US as weak and Iran as their leader.

Unemployment is way up.


Obama is a failed president.

Elect Mitt Romney.

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 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 23, 2012 6:46PM
ummmm hello?? anyone left with a tenth of a brain cell fuctioning?? anyone?? anyone???? guess I'll have to be the voice of reason, THERE ARE NO MORE BULLETS LEFT!!! no bazooka, no flamethrowers nothing, WE ARE OUT OF MONEY and the democraps are out of lies, the publics' no longer buying, Mit Romney is the next president of the United States and the demise of the communist pigs knows as democraps is  coming to fruition
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 23, 2012 5:22PM
Yes, it's comming to a collapse all right. All that fiat currency can only prop up a false economy for as long as the masses are willing to go to the slaughter like sheep. Then one day the wise wake up and start buying gold and silver in bulk fully knowing how much Bernanke and the Feds hate it. Gold is freedom to the people while fiat currency is slavery to the masses. Take the fiat currency away, and you take government controll away. Why do you think our government stopped using precious metals in our money in the 60'S?? Do you think "WE" the people started the Federal Reserve? No, it all started with one president and a group of extreamly greedy bankers who found a way to steal what you have and enslave a nation with worthless paper and hallowed promises. Yesterday the news stated the the economy was growing again and things were getting better, yet the Federal Reserve is buying  mortgages at a phenominal rate just to keep the house of cards from falling and the rich from having worthless paper in their accounts. Come November election, it doesn't matter who wins or not, what will matter is in December when the fiscal cliff is at hand and our nation's wealth and credit will take a land slide dump on the global markets. This will effect everyone from here to China. So for me, i've been buying pleanty of brass and lead to start the new year of 2013!    
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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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