The Fed Follows Suit

Yesterday, the Federal Reserve announced that it will increase its purchases of Mortgage Backed Securities to a total of $1.25Trillion(yes, that's correct), and, more importantly we think, embark upon an aggressive Treasury purchase program worth at least $300Billion. We would like to note that while the Fed's actions "stunned" many an investor, those regular visitors to this page were warned of these Actions in advance. On March 7th, we posted an analysis titled "Bank of England Leading the Way?", in which we predicted the inevitability of aggressive Treasury security purchases by the Federal Reserve.

As is usually the case, the Economic Intelligentsia immediately put forth the usual faux-analysis on the subject. We are told that the Fed is trying to "force" investors out of Treasuries and into riskier asset classes, that the Fed's purchases will be relatively insignificant when compared to the total amount of planned Treasury issuance, and that the Fed's actions will help lower borrowing costs throughout the economy! In our opinion, a more reliable and profound statement arrived via the price and volume activity on the SPDR Gold Trust ETF (GLD) in the moments following the Fed announcement. At the risk of appearing cliche, "A chart is worth a thousand words".

Concerning the size of the Treasury purchase program relative to GDP,budgets, planned issuance,deficits, etc., we would counter that at this point, all such ratios are irrelevant. We say so for the following reason: The size of the program will not stop at $300Billion. For now at least, the headline figure of $300Billion has proved sufficient in lowering the yields at crucial points across the Treasury curve. Unfortunately for the Fed, the Market is no fool, and will undoubtedly begin to question the credit-worthiness of the United States Government. As has consistently been the case over the past 18 months, each Fed action has been met with a swift, shrewd Market counter-action.

We expect that as the Fed/Treasury/Congress continue down this path, the eventual consequence will be the loss of the United States Government's AAA credit rating. Our message to those who deny the veracity of this prediction: Just wait and see. Sphere: Related Content