Friday, November 12, 2010

$7 Billion Ain’t What It Used To Be


This week started with Mr. Obama making the rounds in India, Indonesia, and Korea. He danced, he shook hands, he acted presidential, and he signed a few documents. He made a few speeches and he tried his hand at bending a few arms. In the end, he was mostly rebuffed and turned away. After all, America is not what it used to be. This was simply a week of surrender.
The power of America has been diminished by a reliance upon the Federal Reserve Bank. The bank has now assumed command of the economic helm as it steered the country into the promised QE2 quagmire. Starting on Friday, the Fed began buying Treasuries and bad mortgage paper from its shill banks to the tune of $7 billion per day for the next 8 trading days. Of course, the Fed will plow $600 billion into Treasuries and $300 billion into agency debt by June of 2011. All the while, the government continues to sell economic recovery. Supposedly, the private sector is creating jobs. Supposedly, industrial production is trending up. Supposedly, housing has bottomed. Supposedly, consumers are spending, saving, and growing in confidence. Supposedly, the banks are making a killing and corporate profits are soaring. Supposedly.
Of course, reality is that Cisco crushed the market on Thursday with a poor forecast, homebuilder DR Horton said housing contracts were something that rhymed with ‘sucked’ but worse, and a great proportion of the jobs that were supposedly created were done so by virtue of the mercurial and nefarious birth/ death ratio. Cereal makers were bumming as were Campbell’s and Wendy’s. Did I mention that big bankers were bursting with profit? Maybe reality brought the Fed to their QE2 decision. 
But a funny thing happened on their way down Manipulation Avenue. QE1 and the resulting POMO activity of the Fed served to devalue the US dollar and inflate everything else from stock indices to commodities. This week, the opposite happened. The chart below shows the week with the Dow (in blue) losing more than 200 points and the dollar ETF, UUP (in green) gaining. What? Everyone thought creating dollars from thin air for QE2  would drag the dollar lower. But no, the opposite happened. Of course, with an artificial economy driving an artificial Dow, stocks can only be inflated by a devalued dollar. Will the trend of this week spill over into next week?
Mr. Obama was abroad trying to sucker or foreign friends into following us into the Sea of Insanity. They all balked. The Chinese think we have lost our minds. The Koreans showed Obama the door. The Indonesians politely ushered him out of their country and probably thanked their God that the man didn’t stick around from childhood and become their President. It seems that the rest of the world is looking at the US and wondering how anyone could make such a mess of things. And no, they didn’t want to go along with us to insolvency as we destroy our economy with  conjured dollars, subsidized markets, and pensions that aren’t funded and can’t be funded. 
But the chart is clear. The culprit of a sorry market is a stronger dollar. Perhaps the dollar strengthened because Treasuries have to be bought with dollars. The Fed needed a quick $7 billion. Given the Dow’s reaction, $7 billion just doesn’t buy what it once did. We call that ‘inflation’. Maybe that’s why Wendy’s and Campbell’s have watched profits evaporate. The Fed, on the other hand, is launching their QE program because they say there is deflation about. 
You want the truth? The 146th US bank failed this week on the year. The Treasury buy is a ruse. The real point of the Fed’s QE move is to continue to bail out the banks from their mortgage cancer and in so doing, usurp power from the government to the Fed. The American sheople are so stupid they don’t even realize what is happening. The Fed carries on without any resistance whatsoever. Heck, if $7 billion won’t do the trick, maybe the Fed will throw $100 billion a day at the big banks. Sooner or later, the Dow will respond.

DJIA in blue, UUP in green - 11/8//10 - 11/12/10 intraday 10-min bars.
Chart courtesy
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. 
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