Bill H: Exit Strategy?

To all; the Fed (both Greenspan and Bernanke) have said for years that they cannot spot a bubble while in progress, they can only recognize a bubble once it has burst. Of course their response to any and all burst bubbles is to throw money at it and thus lay the foundation for the next one. If the Fed were a car, say a ’71 Hemi Charger with close to 500 hp, the original brakes would still be in good shape because other than "tapping" on the brake they don’t use them (except for Paul Volcker back in 1980-82). The brakes aren’t ever used because the Fed politically can’t use them. If the Fed were to really step on the brakes the "joy riding" populace would start screaming "go faster". Of course our elected politicians want to "go faster" because they always have another election just around the corner.

What I am getting at here is that the Fed has no chance at all of taking ANYTHING off the table that has already been served. The economy is literally on life support and if the Fed were to unplug anything, cardiac arrest would be almost immediate. The Fed can’t stop absorbing crappy assets from busted balance sheets. They can’t tighten up on money supply, they can’t stop buying MBS nor Treasuries, they have only one pedal and that’s the gas pedal.

The last 18 months of crisis has forced the Treasury to put their balance sheet on the line. As you know, $ trillions have been borrowed and the Fed is monetizing some (maybe alot more than "some") of this debt. Rather than allow rates to go where the market clearing level is, the Fed has been leaning on rates to keep them as low as possible. THEY have and are actively and knowingly creating and pumping the biggest and most stupid bubble of all time.

Stupid? Yes, stupid! Think about this for a moment, what investor with an IQ over 80 would buy a 10 year Treasury with a yield of 3.29% in a depreciating currency? How is it possible to actually gain purchasing power or even break even over 10 years by lending to a bankrupt entity that cannot "pay their bills" without borrowing more? How can this be a good investment if going into it you already know that bond prices are artificially high and yields low because of Fed purchases? WHO could be this stupid? Not foreigners anymore, the US public surely doesn’t have the money and apparently neither Yale nor Harvard have the muscle to fund the Treasury bubble.

The only entity that has enough muscle to keep pumping the Treasury bubble is the Fed. BUT, the world has figured out that the Fed is no Atlas, rather they are more like a 96 year old Jack Lalanne (no offense meant to Mr. Lalanne!) who is about 50 years past his prime. This Treasury bubble will blow up in the Fed’s face and take everything paper with it. Dollar bills, Treasuries, corp. debt, bank accounts, insurance policy balances etc.. What good is having $10,000,000 if a daily newspaper and a cup of coffee cost $20 million?

Think of it this way, if the Fed ends up as the last and only buyer of Treasuries, who will they "sell" to? There is not and cannot be an "exit strategy" once you begin to monetize. A topic of conversation this week was whether the Fed will extend their Treasury purchases past October. Can you guess what the answer is? Duh? They will do whatever, however, legal or not until they can’t or until the ROW stops them (which the ROW is in the process of now).

$1,000 Gold tells you the world is voting no, it tells you the Treasury/Fed "strong Dollar" plan is not working. If they could get Gold below $200 per ounce they would but they can’t. $1,000 Gold and 3% 10 year Treasury do not go hand in hand. One market is right and one is wrong, can you guess which one? The Wall Street saying has always been "don’t bet against the Fed", this has been incorrect for the last 10 years. If you haven’t yet placed your bet against the Fed, the betting windows are about to close, HURRY! Regards and have a nice weekend, Bill H.

P.S. If printing more Dollars is truly the answer to everything, why doesn’t the Fed just call in all Dollars in circulation and then print more and keep them themselves? They could be masters of the Universe and have every morsel of wealth on the planet!