On the heels of two days of continuous Fed propaganda, today James Turk warned King World News that the financial system is now headed directly into the “eye of a hurricane.” Turk also spoke about what Western central planners face going forward and the accompanying market risks and dangers.
Turk: “We had the same reaction to yesterday’s FOMC statement, Eric, as we did after the meeting last month. Interest rates continue to inch upwards. I have been waiting to see whether this would be the result.
An ostensibly dovish statement from the Fed is nevertheless resulting in higher interest rates. In other words, since the announcement of QE1 in March 2009, dovish statements from the Fed were bullish for Treasury paper – meaning lower yields – because the Fed’s buying of paper was soaking up supply. However, we are now in a situation where the Fed is buying nearly all of the Treasury’s new debt issuance, but interest rates are rising….
“Admittedly, part of the reason this is happening is because the market is positioning itself in anticipation of higher interest rates given the Fed’s acknowledgment that its buying of Treasury paper will eventually be tapered, implying that QE will not last forever.
But there is also another dynamic. The federal government continues to run horrendous deficits, and given the unwillingness of the politicians to deal with their spending deficits, there is no effort to seriously address the growing debt. As an indication of how bad things are in Washington DC, the politicians are even playing games with the debt limit, which was the last shred of fiscal discipline being imposed.
So here is the key point: The supply of Treasury debt – both new issuance and the selling of US paper by foreign holders, as was made clear from the latest Treasury TIC report – is now starting to overtake the paper the Fed is soaking up through its QE program. It means that the Fed is losing control.
Because the central planners at the Fed are wedded to their crazy theories, the logical reaction is that the Fed won’t taper, but instead will do the opposite. They will mean buying even more paper and then monetizing it. In other words, the Fed is going to start moving much more rapidly toward monetization with even greater intervention in markets. They are now like mice on a treadmill, so look for them to buy more to try to make their theories work. As a result, the long-term outlook remains clear at this point — QE has put the Fed in an impossible position that will end badly.”