Thursday, April 30, 2009

Fed Monetizing Debt -- How long before the Inflation Comes?

No matter how you cut or slice it, the FED is going to monetize debt. This means you want to be owning stocks and ETFs that benefit from an increase in inflation.

Over the next week, we will be putting up some of our ideas on how to take advantage of this scenario.

If you have been following the charts on All American Investor -- you noticed that I have been talking about rising rates in the ten and thirty year treasuries for a few weeks. If you are not paying close attention to this as in investor you are making a big mistake.

The bond vigilantes are coming back, and soon with a vengeance. Longer dated treasury interest rates are drifting up. This, in spite, of massive buying of treasuries by the FED -- we showed the balance sheet on Saturday.

Here is a snippet from the latest FOMC release:

As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Buy $300 billion of treasuries by Autumn?

The best way to think of the current scenario is like boiling water in a tea pot. Sooner or later, the whistle will blow.

Don't like the above? Remember, I am the same guy that predicted this really in stocks when I wrote:
  • They call me crazy -- S and P 900-1000
  • and, Stocks Don't Fight the Tape.
There is a lot of chicken on the hill. My guess here right now is: material stocks, commodity stocks, related ETFs and short the long bond.
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