Tagged: tapering

Infinite Money Theorem

“What do you see out there?”

Out here in Crested Butte, CO, where the overnight temperature was 35 degrees, we see vast beauty, perhaps unparalleled on the planet.

As for the other “out there,” it’s the No. 1 question we’ve gotten the past two weeks, even with clients reporting financial results. They’re most concerned with the macro view: What do we think will happen to the stock market if and when the Fed stops buying government-backed securities?

Some observers predict doom. If the Fed quits printing money, the helium goes out of the balloon and down it comes. Others see the opposite. Just yesterday Jim Paulsen at Wells Capital said the Fed’s exit means markets can normalize, shifting from arbitraging data to investing in economic growth. He says stocks will rise.

It’s important to understand what the Federal Reserve is doing. The Fed isn’t printing money per se. It’s in effect engaging in a massive derivatives swap – trading one thing for another, neither of which is a hard asset. The Fed buys about $85 billion of Treasury securities and government-backed mortgage derivatives every month. Since these instruments are backed by US taxpayers and derive from either future tax receipts or underlying mortgages, both are derivatives. (more…)