FOMC Puts $2 Trillion Floor On the Balance Sheet

The dollar is flying high this morning, as the knee-jerk reaction to the FOMC announcement yesterday didn't last long. Let me explain… The FOMC statement was full of things that could be taken two different ways, but the first way it was taken was that the cartel would exit its reversal plans and implement a form of quantitative easing (QE)… I call it QE Light… Less filling…

Now… I told you what would happen if the cartel decided to implement QE, and that's exactly what happened, with the dollar getting sold, and currencies along with gold rallied… Shoot Rudy, the stock market here in the US recovered almost all of its 100-point loss for the day in a matter of minutes following the FOMC announcement…

But then, the markets got a really good look at the statement, and in the end, the cartel had not announced a new round of QE (not yet!) Instead, it basically placed a floor on its balance sheet of $2 trillion and decided to keep its bond holdings level to support an economic recovery. It also announced that maturing bonds would be reinvested into longer dated Treasuries to keep rates low for the mortgage sector.

The cartel also assessed that, in the near term, the recovery proved to be “more modestâ€? than it had anticipated. Shoot, if it had only been Pfennig readers six months ago when it made those statements about a growing economy… It would not have opened mouth and inserted foot!

So… As I turn on the currency screens today, I see the euro (EUR) holding on to the 1.30 handle by the skin of its teeth, and gold down $7… Quite a bit different looking than yesterday afternoon, right after the FOMC statement! So… Just put that down as a knee-jerk reaction, and the trading now, as a return to the “flight to safetyâ€? dookie we've seen off and for two years now.

The FOMC averted a HUGE dollar sell-off yesterday by wording what it was doing differently than the markets had seen before… But in the end, isn't it the same stuff? I mean, if it isn't going to reverse its previous bond holding plans, then it is continuing on with the current environment to hold toxic waste bonds and keep interest rates a historic lows… thus further inflating what will end up being the biggest bubble of all time… Treasuries…

Speaking of Treasuries… The ten-year is now at a 2.71% yield… Talk about measly yields! But, that's not as bad as a one-year Treasury Bill… Get this… A 1-year T-Bill currently yields .23%… Now… If you buy that from a broker, and he or she charges you a commission, you're now negative… And… If your money manager buys it for you, you're still negative, because of his or her management fees! Why in the world would anyone buy a T-Bill?

Well…on Monday, the price of oil was $2 higher than it is today… And, while I like to see cheaper gas, I have to wonder just what's going on. Of course the cartel telling everyone that our economy is stuck in the mud isn't going to make anyone think that US consumers will be out buying gas!

Speaking of US consumers and our economy, I'm going to share with you an observation I made last week that falls right into the “economicsâ€? that I use to help me make the calls I make…

I've been camping about the same time of the year with my family for many years. Shoot, I used to go with my beautiful bride's family before we were married! And years ago, the campgrounds would be full, especially on the weekends, and there would be lots of boats in the lake. But since 2000, the campers dwindled, along with the boats in the lake. There was one year, that besides my family, there was only one other family in the campground!

But this year, it was very reminiscent of years before 2000. I thought to myself, Self… I see this as a sign of the economic times. Instead of going to Rome this summer, these people stayed close to home, and camped for their vacation… A sign of poor economic times if you ask me!

And what about the labor crisis here? What's the cartel doing about that? Oh, it is failing miserably once again, at this, that, and anything else it does!

I see where the President signed a $26 billion bill to give emergency aid to states… Didn't I tell you this was coming? And I doubt that $26 billion is going to be near the amount that will be needed by the states… But stop right there and think about what he just did… He took $26 billion of your tax dollars and spent them without your authorization… Once again!

I did see, though, that the bill calls for a reduction of the food stamp program by $11.9 billion… That's interesting isn't it? I mean, I'm all for ending a majority of the spending in these programs, but didn't I just tell you how the number of people on food stamps has grown yesterday? Strange happening as far as I'm concerned…

And did you see where the Pentagon is going to cut thousands of jobs? That's right, thousands… But again, I have to question the timing… Aren't we fighting two wars right now? But then, if there are thousands of people there who aren't needed, why have they waited until now to cut them?

OK… Let's talk about something other than the US economy. I'm growing tired of it!

Let's talk about the Canadian economy… Today, we'll see the color of Canada's trade deficit for June. I'm expecting it to narrow, as I assume that the energy sector will have done enough to narrow the deficit here, which is small in nature, and manageable by all means. Canada's economic growth is solid, folks… No worries here…

And then we have Australia… One of the TVs we had on here yesterday had a spokesperson from Australia on to talk about the Aussie job creation sensation. He announced that there would be free one-year work visas given to people 18-30 to come to Australia and work… Amazing!

That job creation shows up in consumer confidence for sure… And look what we have here! Aussie Consumer Confidence printed last night and showed a nice strong increase for the second consecutive month… +5.4% this month… Following +11.9% last month…

Then there was this… And this story that was in The Washington Post just made me sick! But since I enjoyed it so much (NOT!) I thought I would give you a snippet of it and the link to the whole story, as long as you promise to put away the sharp objects first!

It seems that there's a new way to escape house payments on a home that's underwater and many never recover… It's called “buy and bailâ€?… Where a home owner acquires a new home, before his or her credit rating is ruined, by walking away from the old house that's underwater, or worth less than the mortgage…

So… In essence, the practice of “lie on your loan applicationâ€? is continuing, even though Fannie and Freddie thought they had beefed up their standards to prevent this from happening…

I shake my head in disgust…

To recap… The FOMC did a QE sort-of dance yesterday that caused a knee-jerk reaction, pushing the currencies and gold higher, but only for a short time before the markets realized it wasn't really any new QE. The FOMC also downgraded the economy, thus throwing the markets into a “flight to safety,â€? which has the dollar flying this morning.

Chuck Butler
for The Daily Reckoning

FOMC Puts $2 Trillion Floor On the Balance Sheet originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."