The FED steroid injection - raising the stakes

*The FED going for quantitative easing, a sign of commitment or desperation?

I guess there are several takes on it. The positive one is that the FED gets ahead of the curve. The negative one is the state of the US banking system is in a far worse state than what the market is aware of. The bottom line is that the FED is raising the stakes and increasing the risks, given the heavy dependency on foreign financing due to their mountain of debt.
As of March 11th, the FED;s balancesheet was about 2Trn Usd. With the new measures announced, the FED;s balancesheet is set to expand to more than 4 Trn Usd.


*What are the consequences?
Short term, most likely this will mean an undermining of the USD, so weaker Usd, exporting an easing of monetary conditions abroad in the process. Implied volatility and riskaversion should come lower from this, benefitting riskier assets and narrowing spreads. Commodities should benefit as well, especially energyrelated ones.

Gold shot up yesterday, alledgedly on inflation related concerns. Gold seemed quite isolated in that context, especially with long end yields and riskaversion falling. While Gold could continue to have swift 50-100 Usd moves from here either way in the shortterm, the price action would seem to be reminiscent of a topping out process. Either way, I will make sure to be in on it since it generates serious money.

The Eur/Jpy bullish case should be in fullforce still while the Usd/Jpy one has weaken somewhat due to relative weakened policy credibility, growth on the US front plus vastly changed long yield differentials in favour of the Jpy.

I doubt any carry revival is on the cards near term though. Although financials have run up already, they could have further to go. As Ive pointed out earlier, I prefer US banks stocks to European ones. Mainly due to the cycle of which the US ones are in and the digital risk of the Baltics plus the Eastern europe dilemma which has yet to play out.

I would like to emphasise that these effects are mainly short term as riskaversion could shift drastically should the effect of the recent FED moves dissappoint. Unfortunately, the risks taken by the FED could make things potentially worse beyond the short term.

*Credibility of Mr Bernanke
Only a few days ago Mr Bernanke declared that the US economy would recover in 2010. With this plan enacted it would seem the transparency of the FED is heavily reduced or no longer in place. Both swap spreads and TIPS widened sharply post the announcement yesterday and might be something to keep in the back of ones mind in the midst of all bull talk.




*Positions changes
I have taken profit on my long Eur/Usd options and am awaiting better timing to get back in. Looking for Eur/Usd to reach 1.40 before long.

I have closed out my long Gbp/Jpy,

Gold rallied strongly overnight and while I am still positioned bearish Gold I am opening up for pure gamma plays here as well.


*FED and riskmanagement
The FED is getting plenty of applause for their latest measures and while I have to concede that the FED seem willing to try "anything and everything", they are also increasing risks and raising the stakes via measures that does not really solve the underlying issues. There is a risk that crunchtime is just rolled forward, snowballing it in the process. The Martingale method is not one to apply to riskmanagement but it is the one that the FED currently applies. This is very concerning to me.
The old saying; "When in trouble - double" is not what riskmanagers should apply, neither is it what the FED should. Lets hope it works out. Fingers crossed. (Seems to be the dominant corporate and government riskmanagement strategy out there at the moment, unfortunately).


*Finally how much is a Trillion USD?
With the FED throwing TRN Usd numbers left right and centre, it might be a good idea to get such a number in perspective.
Here are a few illustrations to achieve this; http://www.mint.com/blog/finance-core/visualizing-one-trillion-dollars/


As usual, good luck





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