Loss Control Saturday, December 8, 2012

Fed Finale: The End of Operation Twist, or the Start of QE4? - Read and ponder a quote from the article: "With Operation Twist ending, that means they've run out of short-dated securities to sell in order to purchase more [longer-term securities], so what they've got to move to now is buying up pure $40 billion per month of mortgage-backed securities [QE3]," says Andrew Wilkinson, chief economic strategist at Miller Tabak. "They probably have to compensate for that loss of $40 [billion] to $45 billion per month."

What this means to me is that the Fed needs a new, creative program, not just another QE4.  Here's the problem: The Fed buys up mortgages from big banks like Wells Fargo and Bank of America and in return these banks get dollars in their accounts. What can the banks do with these new dollars?

1. They could lend them out for new mortgages, yes, a great idea but... lending requirements are stiff for new mortgages and inventory of available houses is low... so this plan is not going to work too well in the short term for the Fed. No one is going to sell a house, or a mortgage for that matter.

2. Maybe the banks could invest the money in US Treasuries for the short term just like everyone has been doing for the last several years (especially big Companies, big Banks, wealthy retirees and the Chinese government)... oops! as mentioned in the article above the Fed has "... run out of short-dated securities to sell ..." and the Fed has bought up the longer term securities in previous operation twist. Rates are so low now that no one wants to invest to preserve capital... only to purchase higher priced investments at a future date (2015)? Not convincing to me either.

3. So what will the banks do with the Fed money in the short-term? I guess purchase corporate bonds and stocks yeilding 2.5% which will result in yeilds declining to the level of US Treasuries, or 0.5% above. Of course this just moves the dollars from one bank account to the next. Does this really accomplish anything other than lowering corporate bond and stock yields, ie retirement income?

4. What else could corporations with large cash balances and positive cash flow do now? Read this week's article Freeport Snaps Up Plains, McMoRan decision to invest in the US Plains energy company. Could this be a harbinger of 2013-2015 corporate finance/economics based on current Fed monetary strategies. Avoid investments in risk assets like gold, silver and copper.  Get rid of devaluating dollars and US Treasuries. Move to energy investments with long term demand growth potential with production in the US. Could this strategy also work for my stock portfolio? Maybe... and this has been the investment strategy of Wall Street for at least the last year now.

5. But the fundamental question still remains, how can the Fed "compensate for that loss of $40 [billion] to $45 billion per month?" I guess they just have to sell something else. What could they sell? No one wants worthless mortgages, or do they? Maybe investors do want worthless and problematic mortgages, especially if the mortgages correspond to foreclosed homes, land, and commercial properties. A Fed backed program of returning foreclosed properties back to the private economy might actually promote the "Fed's dual mandate to promote maximum employment and price stability". I like this strategy best because it is focused on US investments and employment, not investments in mining projects overseas. It stimulates at a low level in the US economy, directly provides opportunity for thousands, if not millions of small and medium investors in houses and commercial properties and provide a boost for US employment.

6. Here is a link to my website www.leansupplier.com