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Thread: The FED 'Tapers' again this month ... reactions immediate !!!

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    Default The FED 'Tapers' again this month ... reactions immediate !!!

    from


    (snip)"Stocks fell further Wednesday after the Federal Reserve announced another reduction in its monthly bond buying program. Investors also continued to be worried about emerging markets and weak earnings.

    The Dow Jones industrial average was down more than 200 points shortly after the Fed meeting. Dow components AT&T (T, Fortune 500) and Boeing (BA, Fortune 500), which both offered earnings guidance that disappointed investors, were among the bigger losers The S&P 500 and the Nasdaq both fell more than 1%. (snip)

    (snip)In a widely expected move, the Fed said it will now buy $65 billion in bonds each month, beginning in February. That's down from $75 billion this month and was the second $10 billion reduction in the Fed's long-standing quantitative easing policy since the central bank started its so called tapering. (snip)


    As most dollar den readers already know, the US FED has been pursuing a 'stimulus' policy of printing up ( out of thin air ) $85 per month in 'new' money, and effectively purchasing $85 billion per month worth of securities ... with much of that taking the form of US treasury bonds. Last month the $85 bil dropped to $75 bil, and this month the $75 bil dropped to $65 bil. Why is this of any interest to dollar den readers ???

    - with the FED reducing bond purchases, and the gov't needing to continue selling new bonds to fund deficit spending, the way to attract 'substitute' buyers is by offering higher interest rates. Higher interest rates on T-bonds will propagate to higher interest rates on other types of loans, from mortgages to auto loans to credit cards.

    - with ( implied ) higher US dollar denominated interest rates, the exchange rate of the US dollar is rising versus other currencies. This is generally not good for US companies that export to foreign countries, nor for US based international companies who book a large percentage of their sales in foreign currencies that must be converted back to US dollars. For one example, the US$ / CDN$ exchange rate is now over 1.11 ... meaning that Canadians can't afford to buy American products priced in US$, but that Canadian imports are cheaper for Americans to buy than domestic products.

    - with $10 bil per month less 'hot money' being put into circulation, that means nearly $10 billion that is no longer finding it's way into the US stock markets. Reaction has been immediate, with a 200 point drop in the Dow within minutes of the FED announcement

    - with the resulting volatility in currency exchange rates, commodities from gold to gas to oil are all rising in value ( supposedly as a 'safe haven' for uber-rich investors wishing to avoid future exchange rate losses ). This could soon translate into higher US gasoline prices, higher US utility bills, higher prices for products which require lots of energy input ( like food ), etc.

    - with the strengthening US$ exchange rate versus most other currencies, uber-rich investors are selling off their 'risky' investments in foreign stock markets ( to avoid additional exchange rate losses ). This in turn is causing foreign stock markets to drop ... with 'emerging market' countries dropping substantially !!!

    Moral of the story is arguably this. Today's FED announcement confirms earlier suspicions that the FED will 'remove the punch bowl' which has kept US interest rates low and kept US stock markets rising since the 2008 'crash'. If you are stlll holding US stock shares or bonds, you owe it to yourself to re-evaluate your investment position.
    Last edited by Melonie; 01-29-2014 at 02:21 PM.

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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    It's not a coincidence that the US government is about to introduce MyRAs at the same time, they're meant to create demand for US treasuries. The FED is reducing its engagement in the bond market and the small savers are sucked in (no pun intended) to replace the FED effect. All of this happens when intrest rates are close to generational lows, i.e. bonds are totally overpriced and will perform negatively in the medium and long term.

    What is a MyRA? see here: http://www.zerohedge.com/news/2014-0...t-savings-bond

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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    ^^^ not wanting to go off on a tangent, but with rounds of hearings already having been held in Washington DC on the topic of 'forcing' a certain percentage of IRA / 401k / Roth retirement money to be invested in US treasury bonds, this latest MyRA proposal appears to be one step further down a 'slippery slope'. See

    (snip)"Bottom line: The government may not tax your [ retirement - sic ] money, it may instead force you to buy Treasury securities with your [ retirement - sic ] money. For the government, it is pretty much the same thing as a tax. It results in your money ending up in government coffers to spend at will by government. In turn you will receive government IOU's, i.e., Treasury securities, which may be among the worst investments in the years ahead as interest rates go up and price inflation eats away at the buying power of those IOUs. (snip)

    From a purely economic standpoint, existing IRA's / 401k's / Roths etc. do allow investing in stocks and bonds that are actually denominated in currencies other than the US dollar, in commodities, etc. MyRA's, or US Treasury bonds in general, are ONLY denominated in US dollars. They are also likely to be 'long term' in nature. Thus such proposals would arguably create the same investment risks for Americans tomorrow that is being experienced by Japanese today. As a result of 'Shinzo Abe's' yen devaluation policy and Japanese 'FED' yen printing / 'stimulus', Japanese owners of Japanese gov't bonds are receiving near zero 'interest' earnings, while at the same time the purchasing power of their yen denominated Japanese gov't bonds have fallen 20%+ in 'purchasing power' due to the yen exchange rate dropping 20%+ versus the US dollar / Euro / yuan etc. This in turn has increased yen denominated prices for imported items ( like oil ) and energy intensive domestic items ( like food ) by a significant percentage. This arguably amounts to a 20%+ 'loss' for Japanese gov't bond investors... although the yen denominated price of those Japanese gov't bonds has ( superficially ) remained fairly constant.

    Back to the broader US FED 'tapering' effects, it remains inexplicable that most Americans still view the US dollar as a 'fixed' unit of value measurement. This arguably contributes to misconceptions on the part of most Americans that pricing levels for things like oil & gasoline, food, imported manufactured goods, US stock shares etc. are volatile. The point being missed is that, in today's globalized marketplace, changing US dollar denominated prices for things like oil & gasoline, food, imported manufactured goods, US stock shares etc. are really the result of changing 'purchasing power' of the US dollar itself, as compared to other major world currencies.

    Right now the US dollar is experiencing some relative strength ... which is arguably the short-lived result of a slight increase in US treasury bond interest rates, plus a significant increase in the amount of former yuan, baht, lira etc. denominated foreign investments that are being liquidated to cut exchange rate losses for uber-rich US based investors ... and in the process being reconverted back into US dollars. But in the longer term, it is unlikely that this short-lived US dollar strength can be sustained ... because the US Treasury must ( still ) find willing buyers for future US treasury bonds to continue funding the gov't's deficit spending, the FED is buying fewer US treasuries every month, and the 'one time' return of liquidated foreign investments back into US dollars will stop.

    If and when that happens, just like present day Japanese, Americans will see the US dollar denominated value of their bank accounts, stock shares, bonds, etc. remaining more or less constant, but also seeing the US dollar denominated prices they must pay for energy, food, imported manufactured goods etc. increase substantially. And that arguably bodes badly for girls attempting to sell 'non-essential' goods and services like lap dances and paid webcam, which customers can only afford to buy AFTER they have first finished paying higher prices for energy, food, lowest cost option imported goods, etc.
    Last edited by Melonie; 01-30-2014 at 08:56 AM.

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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    Just curious - How can the government "force" you to buy T-Bonds ? Under what authority ? I know under FDR they prohibited private ownership of gold coins and bullion so maybe they could. Just wondering how that would work ?

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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    Quote Originally Posted by Eric Stoner View Post
    Just curious - How can the government "force" you to buy T-Bonds ? Under what authority ? I know under FDR they prohibited private ownership of gold coins and bullion so maybe they could. Just wondering how that would work ?
    I'm not from the US, but in general I can name some things that have been done before in other countries:

    - The government could source your income by asking your employer to withhold a certain percentage of your income and directly transfer it into "your" retirement account. This is done all over Europe already. It's basicly forced retirement saving. Social Security in the US somewhat resembles that, too. It's basicly camouflaged taxation.
    - a bank levy / deposit tax could be imposed. It would be called "solidarity fee" or something else euphemistic. Banks would just remove a part of your account balance and transfer it into bond investments. It would likely happen over a weekend or a bank holiday would be announced. This was done in Cyprus last year and the IMF and other financial organizations are promoting it as a model for future crises.
    - pension funds could be obliged to put a certain percentage of their portfolios into gov. bonds. Most pension funds are doing this already voluntarily, because traditional investment theory says that a portfolio should be balanced between stocks and bonds. Mandatory portfolio allocation rules already exist in multiple countries.
    - tax incentives could make bond investing appear lucrative. But when accounted for inflation, they will still yield negative returns.
    - it might be mandatory to invest partially into bonds if you want to have the broader based benefits of an IRA and the like. Bond investments might be a precondition to be able to participate in such programs.

    There are even more drastical/tyrannical things, but these are some of the more common methods that come to my mind

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    Banned Melonie's Avatar
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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    Just curious - How can the government "force" you to buy T-Bonds ? Under what authority ? I know under FDR they prohibited private ownership of gold coins and bullion so maybe they could. Just wondering how that would work ?
    Not wanting to perpetuate this tangent ( and in the process take away from the other aspects of the FED's policy change ), but during the Washington hearings the rationale put forth was that, under the authority of the 'general welfare' clause and under cover of 'rule changes' to existing congressionally approved tax advantaged retirement savings programs, that the gov't could mandate some portion of gov't sanctioned tax advantaged retirement accounts must be transferred out of stocks, commodities, private sector bonds, etc. and into US Treasury bonds, on the claimed basis of reducing potential loss risk of one's retirement savings.

    From a more pragmatic viewpoint, if the US Supreme Court could find constitutional grounds for the gov't to 'force' Americans to purchase health insurance or pay a new 'tax', it can similarly 'force' Americans to purchase Treasury Bonds as part of a tax advantaged gov't sanctioned retirement savings program, or lose those tax advantages. One must assume that this constitutional grounds would be limited to funds that are 'enjoying' the tax preferred status of a gov't sanctioned IRA / 401k / Roth etc., and could not extend to 'unencumbered' savings and/or investments. Wild speculation would lead to a conclusion that the 'rule changes' would boil down to something like 'if you want to contribute additional money to an IRA / 401k / Roth etc., that additional money must be 100% allocated to US treasury bond purchases until US treasury bonds comprise 50% of your total IRA / 401k / Roth account's holdings ... and continue to comprise 50% of total account holdings thereafter'. Thus for a middle-aged American with perhaps $100k already contributed to a gov't sanctioned retirement savings program, such a 'rule change' would guarantee that the next $100k worth of contributions must be 100% allocated to the purchase of US Treasury bonds, as well as guaranteeing that 50% of any contributed amounts in excess if that $100k would also be allocated to the purchase of US treasury bonds. Any Americans choosing NOT to contribute additional moneys to their gov't sanctioned retirement programs under such 'new rules' would be free to stop adding money, but would also lose the tax advantage.

    Beyond this, some parties at the hearings called for the immediate mandatory conversion of ( some or all ) existing IRA / 401k / Roth assets into US treasury bonds ... on the justification that large retirement fund 'losses' create an increased burden on the gov't ... via increased future cost of food stamps, subsidized rent, subsidized utilities, Medicare etc. This rationale was similar to the rationale employed that Americans who do not buy health insurance coverage create a similar increased burden on the gov't ... via increased future cost of Medicaid etc.
    Last edited by Melonie; 01-30-2014 at 12:51 PM.

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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    Thanks for the responses. I think the most likely is that they would manipulate the Tax Code but who knows ?

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    Default Re: The FED 'Tapers' again this month ... reactions immediate !!!

    ^^^ ultimately, this will depend on the 'confluence' of many different factors ...

    - the amount of future month / year deficit spending that the gov't continues to generate ( with more new US Treasury Bonds needing to be 'printed' to cover the amount of the deficit ) ... which is dependent on future gov't spending levels, future tax revenue levels, etc.

    - the future level of 'demand' for new US Treasury Bonds from non-US sovereign buyers, typically China, Japan, Saudi Arabia etc. ... which is partially dependent on the degree of 'trade surplus' these countries run versus the USA ( which is arguably declining ).

    - the future level of 'demand' for new US Treasury Bonds from US domestic buyers ... which in the absence of new gov't mandates is partially dependent on the interest rates offered on those new US Treasury Bonds versus interest / dividend rates available from other types of investments ( higher interest paid on US treasury bonds = higher 'demand' from prospective bond buyers). However, this is arguably counter-productive, since higher interest rates ALSO requires the gov't to borrow even more money ( thus print and sell even more new US treasury bonds ) to make interest payments on EXISTING US treasury bonds which must be 'rolled over' ( i.e. actually paying back the principal would consume a huge percentage of tax revenues ) !!!

    - the future purchasing power / strength / exchange rate of the US dollar versus other major world currencies ... with a rising dollar attracting more foreign bond buyers ( because a rise in the US dollar adds to the effective return on investment equation for a buyer booking the gains in Euros, yen, yuan etc. ), but with a falling dollar prompting foreign US treasury bond investors to sell out quickly to minimize exchange rate losses.
    Last edited by Melonie; 01-30-2014 at 02:11 PM.

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