An Unbelievable Fed

Did you know that the down volume on the NYSE on Monday, after accounting for foreign stocks and REITs and closed end bond funds, was 98.6%? That's one of the most lopsided days that history has ever seen. So do you still think selling pressure is used up?

Investors have no reason to buy stocks, and every time the government acts isn't giving them new hope, it's giving them another reason NOT to buy stocks.

The Paulson effect I told you all about a while back (and is now being used all over TV and all over the place) is still working and hasn't failed once. As soon as that man gets on TV the market holds for the first 5 minutes. But then he keeps going and you can watch as the market starts dropping. It's the only reliable options trade on the CME right now.

Now the government is guaranteeing mortgage bonds but you're not seeing any action on that front. Why do you think that is? It's because for the past 7 weeks foreign central banks have been selling agency securities, bringing the Fed's holdings down $93 billion. Now, the Fed has announced they're going to buy $100 billion of the agency securities (I learned that from Art’s article). I've already started buying agency securities in expectation of the move.

So the Fed is literally printing $550 billion to finance the buying of mortgage bonds. Mortgage bond rates are going to continue to go down because nobody wants to buy the houses right now. By buying the bonds now people know that in the future they're going to have to raise taxes later to pay for it. In this situation the herd is knowledgeable enough to know they're going to have to pay for this eventually. It's the biggest lack of confidence in our leadership that we've seen.

The Fed's also began the process of printing $540 billion to special purchase vehicles to buy money market assets from mutual funds. They think that doing this will improve money market investors' liquidity positions and make them willing to buy commercial paper. And don't think they're done yet. They’re going to do T bill redemptions. They're planning on expanding their balance sheet without borrowing money from the treasury.

How do they do that?

They print money and the monetary base goes up.

The only reaction Art and I have is shock.