Last night saw the US Fed unleashed another unprecedented stimulus package pushing it into what Bloomberg aptly described as ‘unchartered territory’. Not un-coincidentally gold jumped 5% and silver 7% and despite a ‘yay free money!’ rally, shares quickly reversed and finished down another 3%.
“In a surprise announcement Monday before markets opened in New York, the U.S. central bank said it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs at rock-bottom levels -- and to help ensure chaotic markets function properly. It also set up programs to ensure credit flows to corporations as well as state and local governments.”
To quantify that the announcement states they will:
“Specifically, the Desk plans to conduct operations totaling approximately $75 billion of Treasury securities and approximately $50 billion of agency MBS [mortgage backed securities] each business day this week, subject to reasonable prices. The Desk will begin agency CMBS purchases this week.”
$125b each DAY! QE2 when unleashed after the market tanked on QE1 finishing saw a total of $500b injected over a 7 month period. That will be exceeded in just 4 days of this program.
One of the most prominent members of the Fed committee and touted as Chair Powell’s replacement is Neel Kashkari. Kashkari was interviewed on America’s 60 Minutes and some of his statements need to be heard in the context of what we have been talking about repeatedly on the implications for gold with the debasement of fiat currency, impending inflation as a direct result against the intrinsic, unexpandable nature of gold and silver.
Here are some of his comments:
“When asked if the Fed will just "literally print money," Kashkari admits: "That's literally what congress has told us to do. That's the authority they have given us, to print money and provide liquidity into the financial system. We create it electronically and we can also print it, with the Treasury Department, so you can get money out of your ATMs."
He was then asked about the bond market stress. "People are shunning US Treasury Bonds, which are always thought to be the safest possible investment," the host says, very matter-of-factly.
Kashkari responds: "Keep in mind, treasury bond prices are still very high relative to history. They're just not quite as high as they were a couple weeks ago. So they're still viewed as a very safe investment. But this fear of where the virus is going to go is leading people to say 'I just want cash'.
Again, matter-of-factly, the host asks: "Can you characterize everything the Fed has done this past week as essentially flooding the system with money?" To which Kashkari responds simply: "Yes."
The host says "And there's no end to your ability to do that?"
"There's no end to our ability to do that." He later added: "We're far from out of ammunition...your ATM is safe, your banks are safe. There's an infinite amount of cash at the Federal Reserve."”
With growing application of “helicopter money” via Government handouts directly to people and business not via banks, Deutsche Bank gave this timely reminder of the possible implications last night:
“What would be disastrous is if governments embarked on New Deal style spending program via monetary financing at a time when it is imposing stringent supply constraints on the economy. The result may be hyperinflation, and end up doing more harm to people's living standards than nothing at all.”
“We are worried that the real pain trade for markets – and the economy – is the long awaited return of inflation.
A good hedge would be to buy gold, as well as inflation linked bonds in the US and Euro Area, which are currently trading at all time lows.”