Diminishing marginal returns of past QE's have thoroughly pissed Mr. Bernanke off. Today's FOMC announcement that the fed will continue buying agency mortgage-backed securities at $40 billion a month, and the committee will purchase $45 billion in longer-term treasuries every month. They drew lines in the sand at a 6.5% unemployment rate and 2.5% inflation.
Unlike operation twist, the Fed won't be selling T-Bills to sterilize the purchases. This is key. Before, the fed would buy treasuries and sell T-Bills to sop up the liquidity it had put out buying Treasuries. Starting next month this will no longer be the case. We're talking flat out money supply increases of $85 billion a month. Initially, the market ran up hard, but by the time the Fed Chairman begun his press conference pressure on the market was mounting. By the time he finished his press conference the pressure was seen fully on the charts.
The market turned lower and looked like a bull trap. This was helped no doubt by tweets from big homey's like Doug Kass. Here's what he was tweeting soon after the announcement while the market was popping like popcorn in the microwave with less than 1 minute left.
For some context, two tweets before these, and prior to the Fed announcement, this is what the big homey tweeted.
Dude is a juggernaut in the trading game so please don't get me wrong.
I can be wrong and he can be right, but this is what makes a market. This is the beauty of the markets. A guppy can stand up to a whale, and win. He has to protect his money, which is many multiples of what I'm trading with, so, I'm not saying he's doing anything wrong ; I'm just saying I think it's time to buy this market.... Aggressively.
In the fed Chairman's press conference he stated in so many words that the Fed couldn't offset the damage that would be done by the fiscal cliff. That was a true lie, because while the fed can't offset the complete fiscal cliff effects, they can offset the first couple of months of the fiscal cliff. Add to that the recent narrowing of the isle between Republicans and Democrats on the major sticking points of the fiscal cliff and it equals "it's time to buy this market."
Full disclosure, I backed a truck up on a $DX_f short today and bought starter positions in $JPM and $GS. I also bought $YG_f back. Why? Because this is unsterilized QE. This is money supply expansion, and while it may not directly impact iPad sales (although, it may, by pushing assets up making some feel richer, and some actually get richer) it will impact asset prices.
It's been beaten into the public's head that QE has ran it's course and won't work anymore.
Our old friend recency bias has a lot of people anchored in this thought. This is a mistake, as the first thing that this new money will effect is risky asset prices. Consumer prices might not sky rocket, but risk assets are a different story.
Operation twist gave with one hand and took with the other, this one just gives.
But what about the fiscal cliff?
This also takes some leverage away from Republicans (those mid trading day press conferences won't rattle markets for long) while giving them huge incentives to come to a deal.
That's because "the rich" that they are so fervently protecting from higher taxes stand to benefit the most from this kind of QE.
The people that get unsterilized QE money first get the greatest benefit since prices won't move (inflate) until after they've begun spending it, so, they get to buy things at pre-inflated prices. Inflation lags it's primary cause, money creation. That lag is a window used by the sharpest market participants to buy risk.
The program starts next month so there is some time. This means between now and then the market will probably be trying to shake out weak hands. That is unless enough were shaken out today. No doubt there will be disbelievers who think this is the same old QE. They'll hoot and holler as the market flutcuates or moves up scaring out whom ever listens to them. Dips are to be bought with both hands here, I think.
I'm being greedy right now. The level of fear and perceived uncertainty is so high that you can buy what you want without chasing the least bit. The markets reversed today but not so much that the $COMP lost 3,000. It ended the day at 3013.81 down -0.28% but not out. The $DX_f is dropping as I write this, and the euro futures have broken major resistance. $YG_f is looking weak flirting with a 1700 breakdown, but that's cool, I'm holding one contract and I can stand the rain for now.
In conclusion, I wouldn't fight up moves here traders. That old adage of "don't fight the fed" is never more prevalent than right now, right here traders. Consider yourselves warned. Good luck, and happy hunting!
crude oil has supply and demand issues, as of now it has disconnected from the rest of the risky assets. Trade it cautiously and don't be surprised if it doesn't stick to the risk script.