Fed bubble is already at $270B

Fed will not be able to get rid of TAF from their portfolio for a long time. Since I suggested about this bubble forming for the first time, it actually doubled. We got the equity rally that I suggested since then. It was supposed to be a short term fix, so far not much has improved and the issue is slowly becoming permanent. TAF has been only growing since its invention...

As I said, the Fed's plan is inflationary, we are already seeing this in the commodity prices. If the Fed is willing to support the stagflation, it won't take long before a sell off in the LT Treasuries takes place. So, Fed can not afford to support the growth unless they know the bulk of the reseting mortgages are already rolled over. Higher LT rates are just detrimental to the real estate and the banks in the short term. It only means maintaining the TAF longer and larger.

The situation have not really improved since we did not see the TAF shrinking yet because the long term rates just shot up since January and the vacant homes are just ticking higher and higher as redfoliage reported today. I think many were not able to refinance and those loans will continue to be slowly written off with the current trend in the LT mortgages. When the mortgages are written off, the banks are selling off the most liquid assets (stocks) to raise cash.

My plan is to stay away from the large cap growth until I see no further deterioration in the LT Treasuries since I do not believe the corporate earnings are in a position to compete against the higher rates, but I did not sell them short. RUT could be an alternative. I don't see much upside for the short term, but there seems to be enough liquidity in the system so it might support a trading range above the March lows...

This is not an easy situation to fix and the current fixes do not seem to be sustainable to me for further equity rally. I can't help but say that the economy will have to cool down further to find the right balance in between the stock, bond, commodity and real estate prices.

The credit spreads did narrow down, but they seem to be hitting a low, the internals are not too bad, but we'll see...

Fed will not be able to get rid of TAF from their portfolio for a long time. Since I suggested about this bubble forming for the first time, it actually doubled. We got the equity rally that I suggested since then. It was supposed to be a short term fix, so far not much has improved and the issue is slowly becoming permanent. TAF has been only growing since its invention...

As I said, the Fed's plan is inflationary, we are already seeing this in the commodity prices. If the Fed is willing to support the stagflation, it won't take long before a sell off in the LT Treasuries takes place. So, Fed can not afford to support the growth unless they know the bulk of the reseting mortgages are already rolled over. Higher LT rates are just detrimental to the real estate and the banks in the short term. It only means maintaining the TAF longer and larger.

The situation have not really improved since we did not see the TAF shrinking yet because the long term rates just shot up since January and the vacant homes are just ticking higher and higher as redfoliage reported today. I think many were not able to refinance and those loans will continue to be slowly written off with the current trend in the LT mortgages. When the mortgages are written off, the banks are selling off the most liquid assets (stocks) to raise cash.

My plan is to stay away from the large cap growth until I see no further deterioration in the LT Treasuries since I do not believe the corporate earnings are in a position to compete against the higher rates, but I did not sell them short. RUT could be an alternative. I don't see much upside for the short term, but there seems to be enough liquidity in the system so it might support a trading range above the March lows...

This is not an easy situation to fix and the current fixes do not seem to be sustainable to me for further equity rally. I can't help but say that the economy will have to cool down further to find the right balance in between the stock, bond, commodity and real estate prices.

The credit spreads did narrow down, but they seem to be hitting a low, the internals are not too bad, but we'll see...

So what?

Thanks arbman for the macro view - i see anecdotal evidene of what you are talking about with the resets. Once the resets are done though, and rates continue to rise, it will be a harsh headwind for the economy. and I hate to think about the TAFs, it gets me angry. klh

I'm not seeing an any real deterioration in the 30 year. It has been in a 50bp range since October and bigger picture, they've been in down trend since June. To my eye, they're discounting recession and asset deflation (duh!). I'm thinking that the best is yet to come for the market when the long bond starts rising. It won't last forever, but both the market and the bonds will discount improving fundamentals and economic strength. Then the Fed will act and down we go. I'm thinking Fall. Mark

During 2001-2003, when the Fed was cutting, the LT rates went to 3-4% at the lowest point and the jumbo mortgages were around 5.5% at some point as I remember. They didn't go up much well into 2004. The LT rates has discounted a recession since last summer, but the long term inflation expectations went up compared to the state the economy has been in since early January. This time the jumbo loans are around 7.25% and it went as low as 6.5% I believe. I see a double bottom forming now, we'll see whether it will break out yet. This is OK when the biggest fear was a deflation, but Fed's rate cuts are approaching to the bottom and the real estate which is the cause of the problems did not really benefit like in 2001-2003. In any case, what I am trying to understand now is whether the corporate earnings can actually compete against the rising long term rates from here, that's all. Naturally, the first reaction against them should be a consolidation in the equities. The rates must clearly go up across the yield curbe in order to cap the inflation from soaring as long as the Fed maintains its large and growing SOMA...