Ben Bernanke's "Quantitative Recycling" Disappoints, the Stock Market Tanks

On closer inspection, people seem to be finding out that Ben Bernanke's "Quantitative Easing Part 2" is not much of an "easing" after all. Not even "lite". All his Fed is going to do (at least so far) is to maintain the current size of their balance sheet ($2 trillion, more or less) by buying Treasuries (notes, and it turns out, bonds and TIPS) from banks with the money freed up from maturing agency bonds and agency-backed MBS. As the result, the excess reserves at the Fed will be maintained.

Some call it "Quantitative Nothingness". I'd say "Quantitative Recycling".

How is this supposed to "stimulate" anything on Main Street? (Answer: it isn't.) Ben is not living up to his moniker "Helicopter Ben", is he? This is worse than "doing more of the same"; he is "doing more of the same on a smaller scale", and pretending to support a sagging (if not toppling) economy while in fact all he's doing is to support the risk assets. Again. For the big banks and their big clients.

This recycling operation will amount to $300 billion or so, although the exact amount is unknown at this point. Judging by the way they have been squawking for a few months, it seems to me that PIMCO has another boatload of Treasuries ($300 billion of them, probably) to sell to Ben, just like they did during the first quantitative easing operation.

US dollar jumped today, so did 30-year bond as it turned out today that the Fed would be buying 30-year bond also (the initial indication was that they would buy 2-10 years). Now the US Treasuries have the floor again, thanks to the ready buyer (the Fed). In order to buy Treasuries you need US dollars. So, US dollars get bid up; export costs go up, import costs go down, trade deficit will go up, pressuring the GDP.

The stock market duly took note today, one day after the Fed's announcement, by gapping down and sinking with no traction whatsoever. Dow lost nearly 2.5%, S&P500 lost 2.82%, Nasdaq lost over 3%. (Another reason why you shouldn't be watching CNBC and listening to Jim Cramer, unless you are going to do the opposite.)

Tweet