QE3 is now a reality to the tune of $40B per month in mortgage backed security purchases. Markets had come to widely expect (90% probability was the number floating around pre-announcement in bond markets), but I certainly did not expect this aggressive of a move. I was expecting more of a UK-style funding-for-lending scheme that would promote direct lending to small business and individuals, but Fed officials seem to prefer market intervention instead of direct financing. They also extended their low-for-long pledge to maintain accommodative interest rate policy until late 2015, which interestingly is beyond Bernanke’s current term.
To put this number in perspective, the ‘normal’ level of Treasury securities held by the Fed was between $700-$800 Billion. QE1 (launched Nov 2008) brought peak holdings to about $2.1 Trillion. November 2010 brought about Son of Quantitative Easing or QE2, which purchased an additional $600 Billion over the course of 9 months (about $60B/month). Thursday’s announcement did not have a total figure in mind, but declared for $40B per month in mortgage purchases instead of Treasuries. Keep in mind with all of these numbers that a fair amount of the original purchases have since matured, so it takes some continued buying just to maintain levels. While this is a smaller number and allows for some time flexibility, the direct intervention in the mortgage market is likely designed to create cheaper access to consumers and spur some housing demand. Bernanke noted that inflation expectations have stayed low throughout this 4 year old experiment and that the employment rate is their primary concern. I am still not convinced that monetary solutions are what will pull the US out of the economic malaise, but at least Bernanke is doing his share of pushing on the string. Some believe this another step towards the Fed targeting Nominal GDP levels
Risk markets were up across the board on the news no questions asked. Anything with a USD denominator was higher. Speculative positions in equities, fixed income, currencies and commodities are all taking a slight turn higher. Silver speculative long futures positions now stand at 26% of open interest, which is the highest since Feb of this year and March 2011 before that. That seems to be a little overbought to me, as those high of numbers usually precipitate a bit of a selloff. Gold spec positions are actually higher as a percentage basis, but are consistently higher and more stable historically, so less scary. I don’t have reproduction rights for some great charts on this, but am working on it.
To the charts. Moral of the story (short term): everything is trading higher.
COW (Chart of the Week): Long term gold and silver front month futures, each tick is one day of trading. Note the large spikes in price on QE1 and QE2, but the muted trading during the initial Operation Twist (which was substantially smaller). While I don’t think the Fed particularly cares about metals prices, they are a good analog for real asset prices in general. The recent rally in both metals has been significant, even when viewed through this 30,000 foot perspective. If the initial market reaction is any indication, we could be in for a good rally going forward. Bernanke has made it very clear that he will pursue any means necessary to get unemployment well below the 8.1% number it currently stands at.
Long spec positions in gold futures (via Bloomberg)
Same thing for silver. Note that runups in spec longs (white line) can precede steep declines. :
Can you say short squeeze? EUR/USD is crushing the shorts. Chart has gone almost parabolic on European progress in the financial crisis and our central bank printing faster than theirs. From the FT: Currency wars redux
Gun to my head: I’d say some pause or even step back is needed before another strong rally, but risk-on markets are hard to time. Silver in particular seems a little overbought, but I think the long term prospects are strong, so some long exposure here is not unreasonable. Exceptionally low real interest rates are bullish for metals and that appears to be the market norm for the foreseeable future. Don’t fight the Fed.
Bradley S. Yates
Bullion Desk- Senior Trader
NTR Bullion Group, LLC