On the 23rd December 2013 the US Federal Reserve turns 100 years old.
To celebrate its going to declare its Quantitative easing where it purchased 3 trillion more bonds post GFC, and then switched these bonds mainly into Mortgage Backed Securities has failed. These bonds are mainly very long dates and when the latests round of QE started the US fed purchased these bonds adding 1.4 trillion of them at absolute lows in the market.
These bonds conservatively have LOSSES if marked to market of USD$140- billion possibly as high as $180- billion. US bond yields instead of falling rose by 1.3% despite these purchases. Loosing 1.3% on a 30 year MBS would equate to almost 26% of the real face value. On top of these 1.4 trillion purchases added since August 2012, the US fed had 1.6 trillion of other long dated assets which marked to market from 2012 to 2013 are showing a loss of $300- billion very conservatively if not closer to $400- billion.
As part of these 100 year celebrations of the US fed on the 23rd December 2013, Alan Greenspan, Ben Bernanke and Janet Yellen the brains behind this policy will reveal this during the festivities and ask for emergency funding to cover this shortfall.
I wrote two papers about the US fed and the QE. The actions are clear, as is the rise in Yields and impacts on mark to market of these purchases.
As an investment professional for over 31 years, I celebrate as always by telling the truth. No matter how painful. The policy did not and does not work and already has a devastating impact as it is the largest riskiest position I have ever seen. The losses to date just 2012-13 are 50 times the largest ever rogue trader who merely lost 6 billion.
As someone who has shared opinions and views for over 15 years for free, of late I was dismayed to find my writings almost verbatim appearing in some prominent paid letter writers blogs. As one I recently wrote appeared within days I thought I would send the very pro USA writer the graphs and hard facts on the issue as he had copied everything else for 15 years. He sadly declined.
As Christmas approaches and the US Feds 100 year party approaches, I wonder when someone will actually broach this subject with the rogue trader called the US federal reserve. As the US lawmakers have made a deal saving 10 billion of the US budget when it's already 17.25 trillion in debt, and patted themselves on the back for a job well done. Last year the US federal side the unpaid Social Security debt grew by 300 billion, US government workers unsaved pensions grew by 250 billion and the Medicaid, Medicare and Obamas medical plan rose by nearly 550 billion. That is a saving one side of 10 billion and a loss the other of 1,100- billion, one is 110 times the other.
It is nearly Christmas, obviously the US government and lawmakers are not about to ask the US fed any questions because their budget talks with a debt of 110% of GDP which will rise to 125% if not 130% of GDP by 2017, are afraid if they asked questions, someone may ask them about the budget. So asking the US fed about 300 billion in losses is not an option for them.
US papers and media would not raise this or any other issue when sadly as Citibank put it recently the “can has been kicked over the edge of the cliff”
Foreign bond holders not totally blind to facts can see as I did from the US Feds own reports and charts, what the holdings were of these bonds, when they added and how much they added and what the present mark to market is. Every junior bond trader in every dealing room on the planet could come up with the same mark to market loss I did. Yet no one will mention this !! No one will mention the dire position of the US government and its actual debt. Agreeing as the spineless politicians did to 10 billion in cuts when the long-term outlook had gone 110 times worse in 2013, is the sad state of affairs.
So at this celebration on December 23rd 2013, the US fed will declare this loss. Say sorry that yes 300 billion is enough to buy 1 million American families a $300,000- house and the economists running the show, fringe economists, will be replaced with someone with market experience and a pragmatic honest view of the world.
I live in hope. I actually wonder when the media will wake up to the worst kept secret in the bond world. As the US treasury tried to issue some debt, to cover this monstrous budget funding hole, the US fed actually LENT more than they issued and for a lot longer. Meanwhile the corporate world knowing the lowest possible rate someone can realistically hope to borrow for 10 years is 1.5% and for 30 years is 1% higher at 2.5%, in 2012 and 2013, corporate issues in the USA are both at record highs, around 1.2 trillion each year.
Anyone with a brain will never lend at below 1.5% for 10 years to someone with a debt of 110% of the GDP and the income out of Corporate tax at record lows and income tax is 18% of GDP. Less than 20 years ago this was close to 30%. this is why the US debt is 110% of GDP, why it will rise to 125% in 2017 and 150% in 2020. This along with an aging population.
Current attacks on the EU have of late failed over debt sizes below 100% for the likes of France for the simple reason, they will HAVE a balanced budget in 2017. USA proposed a deficit of 5% of GDP in 2014 alone. France in income and corporate tax takes ? Close to 30% so to service a debt of 90% of GDP and an income of 30% in primary tax is not an issue. Servicing a debt of 110% with an income of 18% for the USA is. US lawmakers and politicians will be mouthing at the US federal Reserves party platitudes and so too will Ben Bernanake the largest rogue trader of all time. Yellen his right hand person taking over in 2014 will be blind to this as well. It's what happens with a central bank run by astrologers. The last US fed chief with any real outside experience was Volker. Greenspan will also be there, but as he is 94, I am not sure he has been aware of anything since Ronald Regan was in power.
In the end, the 4 trillion in assets on the US federal reserves books will need to be funded forever. Will the overall global market be tolerant of the US debt rising by 5 trillion by this time in 2017, likely 6 or 7 trillion ? Is it possible if the US fed continues the QE at 1 trillion more a year, increases in other debt of 1 trillion a year and the US government adding at 1.5 trillion a year so 3.5 trillion a year, is the world able to fund this ?
Warren Buffett even mentioned the USA is borrowing off the Chinese, supposedly its the poor borrowing off the rich but this is now the opposite. Between Japan and OPEC and China and places like Singapore and Hong kong. In 2013 they fund around 10 trillion of US debt. They are the much-needed funders for the expanded intended operations looking forward. It took these nations over 20 years to accumulate this wealth. About 500 billion is added to this a year. The demand in total of proposed Budget and US fed and Expanded borrowings outside this each year 2014 looking forward just till 2017 are 3.5 trillion.
It is NOT possible for them to lend even 2 trillion even if they wanted to in 2014, they simply do not have it. As such the US QE program adding another 1 trillion to this overall mess is NOT going to make rates in bonds lower, it's helping to drive them higher. Even if this was removed, the US government addition of 5-6 trillion by 2017 I am not sure even this could be funded. Let alone the ever-increasing corporate debt and the US agency debt rising between them at a 1 trillion a year pace.
I know, sadly no one will speak of either issue at the Feds 100th Birthday party. Because if they speak about one issue, the other will have to be raised. In 2014 and beyond this is the only issue for the global economy as it is a global issue. A central bank out of control married with a government who's spending is out of control. I hope by this time next near, since no action will take part on either part, the price of borrowing US 10 years and 30 years reflects this and its 1% higher in yield.
Happy Birthday US Fed.
I was going to run a book to see who would be the first media outlet to actually mention this loss .... no one seems to be willing to touch it }
Here are the PDF's on the topic with the US feds own charts and data on their holdings.