Did Bernanke Bluff About QE3?

The markets roared from June to September, ever Fed mouthpiece Jon Hilsenrath of the WSJ penned an article calling for more QE in June. Fast-forward to mid-September and the Fed did indeed announce QE3, a plan that will see the Fed monetize $40 billion worth of Mortgage Backed Securities in addition to its plans to Twist $45 billion worth of Treasuries per month: a total monetization scheme of $85 billion.

However, since that time, the Fed’s balance sheet has increased just $3 billion.

Now, it takes several weeks for MBS transactions to settle, so the Fed will announce its MBS purchases since QE 3 started today at 2PM. But if that number is lower than $37 billion (how much the Fed should have bought in the last four weeks) then the Fed lied about QE 3.

In addition to this development, I want to draw your attention to the fact that the Fed balance sheet is DOWN $50 billion year over year. This confirms that the Fed has in fact been engaging in mostly verbal intervention over the last year rather than actual monetary intervention.

The implications of this are of major import.

For one thing, it indicates that the market rally on hopes of more Fed juice is in fact based on a myth. The primary driver of all stock moves has been based on hopes of more liquidity from the Fed and other Central Banks. But the Fed’s balance sheet indicates that this hope is not based on fact. That does not bode well for the bulls.

A second implication concerns the multi-trillion Dollar question: whether the Fed has in fact used up its gunpowder with all of its monetary schemes. After all, the market is roughly break-even since the Fed announced QE 3. Could it be that the market is no longer reacting to Fed action?

If that is the case, then the Bernanke put is over.

These are items to be watching for. We’ll find out the details of the Fed’s actions in an hour or so. But the tide may in fact be turning regarding the success of the Fed’s actions in pushing stocks higher.

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Graham Summers







Posted by Phoenix Capital Research