The F_E_D's Fisher Is the Bad Cop

I don't know if we'll see the bad cop/good cop routine between the 4 F_E_D speakers from now until Wednesday, but the Dallas F_E_D's Fisher would probably fall in to the "bad cop" camp...

The "Bern-an-ki Put" refers to QE and how Bernie and his merry men can never stop QE and thus the F_E_D Put protects bulls like an invisible cloak. Fisher just warned about this in saying US investors Can't rely on a "F_E_D Put"...


"Financial markets may have become too acustomed to what some have depicted as a Fed put," Dallas Fed's Fisher warns, causing "serious misallocations of capital."

In his prepared remarks that were released as they usually are, before the speech, he referenced the Gordian Knot and this is where things get interesting, you may want to come back to this later when you have time...

Excerpt from the Dallas F_E_D's Fisher's prepared statement....

This is a delicate moment. The Fed has created a monetary Gordian Knot. You can see the developing complexity of that knot in this sequence of slides tracing the change in our portfolio structure with each phase of QE.

Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS.

The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot.

Those of you familiar with the Gordian legend know there were two versions to it: One holds that Alexander the Great simply dispatched with the problem by slicing the intractable knot in half with his sword; the other posits that Alexander pulled the knot out of its pole pin, exposed the two ends of the cord and proceeded to untie it. According to the myth, the oracles then divined that he would go on to conquer the world.

There is no Alexander to simply slice the complex knot that we have created with our rounds of QE. Instead, when the right time comes, we must carefully remove the program's pole pin and gingerly unwind it so as not to prompt market havoc. For starters though, we need to stop building upon the knot. For this reason, I have advocated that we socialize the idea of the inevitability of our dialing back and eventually ending our LSAPs. In June, I argued for the Chairman to signal this possibility at his last press conference and at last week’s meeting suggested that we should gird our loins to make our first move this fall. We shall see if that recommendation obtains with the majority of the Committee.