Last week I was fishing on Pickwick Lake. This is one of several river-lakes that exist on the Tennessee River system and it provides power through its TVA hydro-electric dam, tens of thousands of acres of recreational areas, and important shipping lanes for commerce.
Night had fallen, I was still fishing, and I didn’t have a care in the world. This is the kind of place that makes you understand how Huck Finn must have felt…it’s just you and the river and nothing else. At one point I heard some commotion around the bend…it sounded like guys loading a boat on one of the islands in the middle of the river. A few minutes later it started getting bright, as if the sun itself were about to come around the corner. Soon enough a very large tugboat rounded the bend pushing 3 immense barges. This thing was humongous. I imagine this thing ran several hundred feet end-to-end. It was B-I-G.
In maritime navigation there is an unwritten rule known as “the law of gross tonnage”. This rule states that even though you may have the right of way…you don’t want to push the issue with a much larger craft. As the captain of an 18 foot aluminum hull bass boat I’m acutely aware of which side of the “law of gross tonnage” I fall on in this situation. If big bertha needs room in the shipping channel then she’s gettin’ it…because I stand no chance of living if I get in her way. Ultimately this behemoth crawls past me and moves down the river into the night with its two huge spotlights looking out like giant eyes and lighting up the channel a mile ahead.
I make a mental note to stay alert for these things and then I get back to fishing. A short time later I decide to depart. I dial up the coordinates for my truck on the GPS, point the boat south, and head down river enjoying the cool air and the stars above. As I navigate back toward my launch site I come upon the beast again. It is taking up much of the shipping channel and I consider passing it to save time. A quick review of the situation yields a long list of things that can go wrong by passing this beast in the dark and a very short list of positives. They likely can’t see me on radar or by sight and the channel is very narrow so I could run aground or get crushed. Ultimately I figure better safe than sorry so I hang back a few hundred yards and I’ll just float along behind them until I get where I need to go.
Not long after I settle in at what I deem to be an appropriate following distance I notice some very strange activity. The boat is acting very squirrely. The stern is just shifting back and forth and vibrating and the entire boat just feels…shaky. I’m only doing 5 MPH and there is no wake being put out by this barge…but something is definitely not right. It took a moment but eventually I realized that I was in the “wheel wash” of the giant barge ahead of me. The propellers on these boats move so much water that they create a huge swath of turbulence behind them. As it turns out this is a very dangerous place to be.
Days later I sit at my desk, looking at my Bloomberg and I watch the market deal with the “wheel wash” put out by the Fed. Like the Tugboat on the river the Fed is the big force in the market right now, they are pushing a huge load of money into Treasuries and their actions will create a significant amount of turbulence along the way. The last three days of trading have been turbulent to say the least. We’ve seen the 10-year Treasury trade from a low of 2.60% on 11/12/10 to a high of 2.96% on 11/16/10 to the current 2.82%.
What should we expect?
The Fed is just beginning on their QE2 journey. They are pushing a barge filled with $900 billion dollars into this market and they will be leaving lower rates in their wake. To date they’ve only invested $28 billion. While Treasury yields have popped up recently I don’t expect that trend to hold up in the wake of QE2. I continue to view pullbacks as buying opportunities. I think there will be some opportunity to take advantage of the turbulence as the Fed proceeds.
The headlines are littered with complaints about this program…from foreign leaders to economists it is difficult to find anyone outside of the Fed who is a big fan of it. I don’t expect those complaints to change the course of this ship. Almost as if it were in response to the criticism we’ve had several Fed members come out this week and speak in support of QE2. Just today Bernanke spoke to the Senate Banking Committee and he said that QE2 could create 700,000 jobs over the next two years. They see this is a very beneficial program on a number of levels. I wouldn’t hold my breath waiting for the Fed to come out, admit this was all a big mistake, and cancel the spending.
What’s on the horizon?
This morning we had CPI numbers that lend credence to the Feds argument that disinflation is still a problem. Every measure of CPI came out lower than the survey estimates. Tomorrow we get Initial Jobless Claims, Continuing Claims, Philly Fed Index, and next week is full of data.
The Fed will be buying bonds each day this week. They have roughly $105 billion to put to work this month and to date they’ve only spent $28 billion. The next FOMC meeting is on 12/14/10.
What are banks doing?
Activity lately has been brisk with a lot of money being put to work in lower coupon MBS. This week we saw a lot of 15 yr 3.00% MBS with par handles on them. This type of structure has a very large fan base.
Additionally we are seeing a continued trend of banks taking gains prior to year end.
If you have any questions or if there is anything else I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
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