Japan Vs US on Quant Easing

30 Year Capitulation

This looks like it to me. The Fed will not let the destruction continue much more. Mortgage stimulus is under assault. It will be a difficult month to be long via leverage, so it might be wise to stay small until right before June 24th, assuming the Fed does not step in to increase the buyback in some sort of surprise manner. Might be wise to hedge the purchase with gold bars, however. Mark the call at June 116'090. For entry, I suggest a 5% stop or better yet calls for August that will last well into the meeting.

Is This the Real Thing? (On Pending Reflation)

For the past several years, I have monitored treasuries against the dollar to confirm whether bearish dollar moves were sustainable. The treasury market foretold the lack of sustainability of the 2008 commodity boom; And it foretold the same impermanence when the Canadian dollar flew past parity. I have found no more fascinating and useful an economic indicator than the price of the 30 year treasury bond against the US dollar.

For the first time in recent years, universal dollar weakness, including weakness versus the Yen, is being confirmed by a little mini-flight on long maturity treasuries. This is worrisome as it obviously does not bode well for treasury bulls, and ultimately the Fed is placed into a little tighter corner than it has had to deal with recently. Either it turns the on faucet to increase the rate of debt monetization (as latest minutes reveal) via outright treasury purchases, accelerating dollar overshoot, or it shows restraint, letting the free market decide where the long term yield shall be. My flip flop between being a treasury bull and assumption of the more consensus reflationary scenario has come full circle.

The little bit of irony is that more the Fed targets longer rates, the more control it forgoes of future monetary tightening with disastrous consequences. This bodes poorly for the dollar, and serves as an effective devaluation by proxy. Investors may require a greater risk premium than before to buy treasury assets even in the face of a guaranteed treasury bid, as dollar exchange rates fall. This points to an environment where amidst Fed price supports and interest rate targeting, they end up being the only holder of long maturity treasuries. Upon commencement of monetary tightening policy, we will see sudden sharp moves on the long end. At that point, a mere removal of the Fed bid will see a several hundred basis point move on the long end. Central bank asset liquidation will be another story. For this reason, it will be a terribly politically difficult effort for the Fed to actually tighten this time around. It points to a replay of the Volcker scenario.

In the end, this (increasing QE) is unbelievably the right thing for the Fed to do if it is to successfully prevent liquidationists from taking assets from the current generation of capital holders. The dollar needs to be weaker to stimulate our export economy, end dollar hoarding and resume investment appetite. Inflation is a gift to the debt holders, and will stop bank insolvency in its tracks. The long run circumstances are an obvious one-off inflationary move the Fed is unable to neutralize unless it is willing to sell its agency MBS assets into an open market, once again shooting the mortgage market in the head. To me, this points to a permanent move to a higher price level.

The contrary argument of course is that no matter how much the Fed prints (within the under 10 trillion dollar range, of course) that it will be impotent against the wealth destruction we've already seen, itself in the many trillions. I find it easy to challenge that assumption, especially now that the Fed has so flexibly responded in its program creation. In this week's most important unnoticed headline, the Fed has finally activated the TALF, making the Fed's trillion dollar pledge actually useful to enable banks to offload old CMBS assets. PPIP is coming. And all of this several trillion dollars of treasury supply that is driving yields up will be spending into the economy that would not have otherwise happened so quickly. Government spending is directly augmented into GDP 1:1.

The multiplier effect of the impending monetary flood we are about to see in the next 6 months has a great chance of successfully offsetting the wealth destruction of the late crash of 08. Unlike the six hundred billion of monetary base currently sitting in excess reserves not being multiplied into the money supply, TALF, PPIP, QE, and treasury supply (stimulus) will be another story. That money will be multiplied, in a way Americans have never seen before.

S&P Breakout above 900?

Better prudence after a 35% rally from S&P 666 dictates we get a selloff at this price range, and consolidate for the rest of the year before the next move up.

But I have a hunch reality has nothing to do with measured moves and the sarcastic title of this message isn't far from one of the cards in the deck. Data is turning up, VIX is down, treasury yields are portending recovery (remember, even though rising yields are supply driven right now, that supply signifies a direct component of GDP increase), and even the most bearish natural gas is bouncing back up.

Just as the S&P fell from 1200 to the 900 range in a period of two weeks, there is no reason why the opposite could not happen in a frenzied short covering rally. There are no sizeable sellers here. Even though this move up may be 'fake', is it any less justified than the S&P falling from 1585 to 666 (58%) over what may be less than a 10% drop in GDP?

I am not loading up here, as I already did that on the way down. But I'm not selling in my long term account either. My less 'absurd' expectation is that the S&P corrects soon, and we go nowhere for a while. But on the same coin, as I've written before, what makes a multiple? Risk free yields are still 3-4% (25-33 multiple) on long maturity money, and investment grade yields are in the 4.7% (21 multiple) range on 10 year money. Considering an equities market trading so close to replacement value, a high multiple can be logically justified. There is enormous earnings capacity to be realized as the reflation continues. So how about a 21 multiple to a forward earnings stream of $90 (2-3 years out)? Just kidding. Or am I? Pricing on earnings expectations gets several years ahead of itself all the time, especially when people feel safe to buy. Regardless of how insane that may appear, arguing the S&P should be at 1200 versus 800 (or even 400) reveals itself as an equally valid subjective exercise. Flip a coin, but the in the long run, as long as the Fed is able to print, the odds are in your favor as a buyer considering how close we are to book value in so many stocks.