Monday, April 5, 2010

Fed Ends QE and Buying of Mortgage ABS: U.S. Must Now Walk Without Crutches, on Gangrenous Legs

Loved the comment from Ambrose Evans-Pritchard:

"The most audacious monetary experiment in modern history ended on April Fools' Day. America must walk without crutches, on gangrenous legs."

He was referring to the Fed having completed its purchase of $1.7T of mortgage securities, agency debt and US Treasuries, according to the paper, credit easing that allowed Bernanke to create stimulus equal to 12% of GDP (he also messed up the exchange rate, showing USD $1.7 trillion as being £1.1B, but never mind that, surely a typo)

Evans-Pritchard actually thinks that Ben Bernanke and Mervyn King saved the world from a potential calamity.

"The $1.7T created out of nothing will vanish as the bonds are sold on the open market. Not too quickly, let us hope. Easy money must cushion the blow of spending cuts. Even talk of ending QE amounts to tightening. While the US economy has begun to create jobs again – plus 114,000 in March, stripping out short-term census workers – there were false dawns in 2002 and 1982. The broader U6 jobless rate nudged up to 16.9pc.

Bond vigilantes ask who will step into the Fed's shoes to soak up the flood of debt from Washington, whether from the Obama Treasury or from Fannie Mae and Freddie Mac – the mortgage giants on death row".

As we have noted here last week, Treasury yields have risen significantly in recent days. Evans notes that 30-year mortgages have risen to 5.08% from 4.71% in December. "The US housing market looks too sickly to withstand this. New home sales have fallen for four months in a row, dropping to a half-century low in February. The inventory of unsold homes has jumped to 8.6 months supply. Some 24pc of mortgages are in negative equity".

We prepared this chart that shows the yields rising on most Treasuries, and their effect on the TLT and TBT ETFs:

He concludes:

"My fear is that the Fed will repeat the mistake – in this case by reversing QE too soon. The problem is Mr Bernanke's ideological doctrine of "creditism".
Is the Fed chairman worshipping a false religion? Was Milton Friedman right in arguing that the quantity of (broad) money is what is what matters most, not the credit mechanism?
Upon this abstruse doctrinal point will depend – perhaps – whether the Atlantic economies rise above stall speed or lurch into a double-dip recession".

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