September 20, 2017

Wednesday Off-Topic (Moderated) Open Thread (092017)

Filed under: Lucid Links — Tom @ 6:00 am

This open thread is meant for commenters to post on items either briefly noted below (if any) or otherwise not covered at this blog. Rules are here.



  1. How to save free market health care out of the ruins of Obamacare

    Comment by dscott — September 20, 2017 @ 10:20 am

  2. Interesting thought question:

    Since the Fed bought up stocks to place a floor on the market, now that they have $4 Trillion in stock assets, when they “unwind” this position, will they be using that money to pay off US Treasuries???? In the process pay down $4T of Obama’s amassed $10T debt?

    Comment by dscott — September 20, 2017 @ 11:20 am

  3. I think the Fed bought treasuries and mortgage-backed securities, freeing up the banks to invest $4 trillion more in stocks, and arguably propping up the market. If you have contrary evidence, let e know.

    Comment by Tom — September 20, 2017 @ 11:51 pm

  4. #3, Based on my quick searches:

    On the surface it would seem your understanding of the Fed’s purchases is correct…

    The Fed Doubles Down: Reverses QE, Keeps Hawkish Tilt

    The Federal Reserve took a small step to begin unwinding its crisis-driven asset purchases on Wednesday, but since the move was widely expected, the meeting’s real drama hinged on the outlook for future rate hikes.

    Despite a string of benign inflation readings, Fed policymakers stuck to their guns, indicating a likelihood of four more rate hikes through the end of 2018.

    The updated outlook reflects a stark contrast with financial-market pricing, which sees just one rate hike (in December) likely through August 2018, according to the CME Group FedWatch tool. The odds of a rate hike by December rose to about 67% from 58% a day ago and just below 50-50 a week earlier.

    Starting in October, the Fed said it will gradually begin scaling back its $4.5 trillion balance sheet by letting $10 billion in principal run off per month, rather than continuing to reinvest all proceeds of maturing Treasury and mortgage bonds. bolds mine

    QE3: Will The Fed Buy Stocks?

    Jun. 5, 2012 9:21 AM ET

    Very little consideration is given to the content of those potential asset purchases, as the assumption is that QE3 will look just like QE1 and 2.

    In QE1, the Fed purchased Mortgage Backed and Agency securities as well as Treasuries while in QE2 it concentrated on Treasuries. Between November 2008 (QE1) and mid-2011 (QE2), the FOMC added up a grand total of $2.350Bn to the size of the Fed balance sheet.

    QE2 was complemented with the current “Maturity Extension Program,” whereby the Fed sells short-dated securities and buys long-dated ones, in an effort to lower the yield on government bonds. The goal is to cut long-term rates, boost investment and encourage risk taking by fighting risk aversion: the idea is that if the Fed buys Treasuries, lower long term rates will percolate elsewhere in corporate bonds and stock prices.

    However, it has been noted that non typical futures purchases were made after hours that re-inflated the stock market:

    Is The Fed Buying Stocks?

    Jan. 11, 2015 3:39 AM ET

    There is a small minority of market commentators, considered conspiracy theorists by the mainstream, who claim the Federal Reserve has been active in the stock market, purchasing the stock indices or futures on the indices, in order to prop up prices. Otherwise known as the “plunge protection team,” this group of former Wall Street traders, concealed behind closed doors deep within the money management wing of the New York Fed, steps into the market with deep pockets when prices start to fall. This is of course nothing but conjecture. No one has any proof. Yet we do know that the Federal Reserve has had an impact on the stock market, which has been waning over the course of the past year as the Fed’s final quantitative easing program (QE) came to an end on October 31.

    No one has a roadmap that shows precisely how the money created by the Fed ($3.5 trillion) from its QE programs works its way into the stock market, but the tight correlation between QE and stock market performance is obvious. Jim Bianco of Bianco Research has been continuously updating this chart he created to show that correlation.

    June 27, 2014
    Is the Federal Reserve Directly Controlling the Stock Market?

    Indications of market activity indicates that the Fed is doing something.

    The issue of the Fed buying stocks/assets has been alluded to by Yellen herself, note the date of the article:

    SEPTEMBER 29, 2016 / 4:44 PM / A YEAR AGO
    Yellen says Fed purchases of stocks, corporate bonds could help in a downturn

    The article incorrectly claims this is illegal, the following articles say it is perfectly legal for them to do so. Knowing liberals as I do, and their tactic of “it is better to ask forgiveness than to ask permission”. This statement by Yellen should be taken as an admission the Fed did indeed buy stocks/assets or futures to prop up the market. They are dancing around the perception of “rigging the market”. Think of Yellen’s statement as a “misrepresentation” of future versus past tense to float the trial balloon IF such tactics would be denounced and cause issues of credibility.

    The Fed Will Buy Stocks During QE4 – What’s Your Plan In The Meantime?

    Sep.30.16 bolds mine, note date


    The Fed’s slight of hand has been noticed:

    Note the date:

    JAN 30, 2013 @ 09:59 AM

    How The Fed Is Helping To Rig The Stock Market

    There’s been a lot of talk about the Federal Reserve rigging the stock market. If you’ve been wondering, as I have, how it is being done, here’s some terrific insight from our own David Santschi.

    David wrote in this week’s TrimTabs Weekly Liquidity Review, “The Fed is exchanging about $4 billion in newly created money every business day for various types of bonds. All else being equal, the Fed’s bond buying puts more money in investors’ hands to buy other assets, including stocks.”

    I had thought that the major bond dealers sold back to the Treasury the bonds that they bought from the Treasury, making it pretty much of a wash transaction. What I had not realized, until I saw what David wrote, is that major bond traders when they sell Treasurys back to the Fed on the same day then buy other bonds from other bond dealers. And as this buying and selling goes down the chain, Voila. Apparently some of the Fed’s newly created money ends up in the equity market.

    Here is what happens, as I see it now. Every day, Federal Reserve traders are buying about $4 billion in long- term Treasurys and mortgage bonds from major trading houses. How does the Fed pay for those purchases? Simple. The Fed gives the seller a credit on their Federal Reserve statement. Remember, the Fed is a bank that can legally give away money. Meanwhile, the seller of bonds to the Fed can then withdraw some or all of that money, or leave it on deposit with the Fed. bolds mine

    Note that we have discussed before the wash sales the Fed has done with the banks on bonds whereby the banks made a profit on the interest as a means to recover their balance sheet losses. It appears they manipulated the market with the same tactics.

    The question has been discussed prior and during the 2009 financial crisis that the Fed does have the means and authority to purchase stocks/assets IF NECESSARY.

    Is The U.S. Government Buying Stocks?

    …The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as
    a way to boost falling equity prices. Some of such policy actions seem
    extreme but they were in the playbook that Governor Bernanke described
    in his 2002 speech on how to avoid deflation…

    … As far as we know, it is not illegal for the Federal Reserve or the
    U.S. Treasury to buy S&P 500 futures. Moreover, several officials
    have suggested the government should support stock prices.
    For example, former Fed board member Robert Heller opined in the Wall
    Street Journal in 1989, “Instead of flooding the entire economy with
    liquidity, and thereby increasing the danger of inflation, the Fed
    could support the stock market directly by buying market averages in
    the futures market, thereby stabilizing the market as a whole.”
    In a Financial Times article in 2002, an unidentified Fed official was
    quoted as acknowledging that policymakers had considered buying U.S.
    equities directly, not just futures. The official mentioned that the
    Fed could “theoretically buy anything to pump money into the system.”

    In an article in the Daily Telegraph in 2006, former Clinton
    administration official George Stephanopoulos mentioned the existence
    of “an informal agreement among the major banks to come in and start to
    buy stock if there appears to be a problem.”

    Comment by dscott — September 21, 2017 @ 9:02 am

  5. dscott, I did a post on how Rick Santelli blasted the Fed for entertaining the idea of buying stocks.

    As to the QE wind-down, at the rate quoted, it will 450 months to complete. The Obama nightmare will be haunting us for more than 37 years. Without QE, the economy would have collapsed into a fiery heap. The Obama admin, with media help, intimidated Ben Bernanke into continuing it well after it was justified, because it adamantly refused to do anything about spending in the interest of permanently establishing a deeper deep state:

    Comment by Tom — September 23, 2017 @ 4:27 pm

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