Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.
I had an exchange this morning with Mark Dow
, who I consider to be one of the sharpest policy minds around.
He has been steadfastly bullish for quite some time; his confidence in the Federal Reserve has repeatedly been shared in this space and his primary thesis is that Fed printing won’t cause inflation or debasement—not with a credit overhang and deleveraging.
He continues to be constructive on how Ben Bernanke and his cabal of central bankers are navigating this historic stretch.
I asked him if he still had a high degree of confidence that the Fed knows exactly what they're doing. His response:
It’s like people won’t take yes for an answer. It’s not risk-free but it is working much better than virtually everyone thought. And it’s getting less risky, not more, with every passing day—as we get closer to the end game. It almost feels like people are unhappy that I’m trying to take their outrage away.
I responded, "Is the end game ‘maturity’ and for lack of a better term, a massive 'write-off'?"
Yep; I still think they will let the book run off. If the market gives them the opportunity to sell without running the risk of destabilizing, they might sell some. But their funding is secure, so they can’t be forced to sell and they will end up making money on QE, no matter how high rates go.
They have made so much money already that it would be almost impossible for them to lose money in the overall operation. Funding is free and coupons are generating 3-4% a year. It’s the world’s sweetest carry book. They are sending hundreds of billions to the Treasury every year.
Scenarios of great losses or being forced to sell into a weak market are fanciful ones propagated by people who are desperately clinging to any semi-plausible story that there will still be a massive blowup and they will somehow be proven right. These are the same people who said the stress test wouldn’t work, TARP was bad money after good through backdoor socialization of the banks, inflation was going to explode, the US Treasury market would collapse, the deficit wasn’t going to be cut in half by cyclical forces, yada, yada, yada. These policy bears are dead or dying.
As you know, I have always said the odds of them getting this right were far greater than those the market was assigning. And so far, things are playing out in a way that is consistent with this scenario. In trading, if your thesis is working you stick with it. The same applies to economics.
Food for thought; we've discussed various downside scenarios, including channeling the always-savvy Jeff Saut
yesterday, and we always strive to see the entire probability spectrum.
And now we do.
No positions in stocks mentioned.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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