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Posted in Liquidity Trader

Far Goes Katchadakota

Michael Derby had a piece in the Journal covering Minneapolis Fed Pres Catchadodgedakota saying the new Fed asset buys won’t do much. That’s a misdirection play, because the Fed is already levitating the market with QL 1.5.

It is not what or how much the Fed buys that matters. Purchases from Primary Dealers goose the markets. Purchases from other financial system players via unconventional channels do not. The Fed learned its lesson in September October 2008, when it fed cash direct into the banks and other players via the alphabet soup programs while withdrawing it from PD trading accounts. The markets collapsed because the PDs were unable to maintain a bid in the equity markets where they and their correspondents are the market makers.

The Fed now understands that its primary tool is to use its henchmen to drive financial asset prices higher to create the impression that things are getting better. This is what they did with QE I. Stock prices rose and the economy gave a false impression of recovery. When they stopped QE1 at the end of March, the stock market stopped going up in April and collapsed a month later. The Fed then realized that it needed an excuse to start feeding the Primary Dealers again. It came up with what I call Quantitative Leveling 1.5 (QL 1.5) but it’s nothing more than a disguised way to pump massive amounts of cash back into Primary Dealer trading accounts.

It’s a scam, but these things do work for a while. More discussion here or add your comments below.

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