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Dallas Federal Reserve President Richard Fischer has said that the Fed is risking engaging in "Hotel California" type policies as it greatly expands its balance sheet.

http://delong.typepad.com/sdj/2012/12/what-are-the-risks-and...

A number of other commentators have expressed concerns about the ability of the Fed to unwind positions in the future especially for longer term government debt. It would seem that as the economy improves there will be upward pressure on interest rates and selling long term debt securities would be quite difficult without taking large losses. This is in contrast to say buying AIG stock at the bottom and then expecting its prospects to improve as the economy has improved.

In looking at 2012, stock markets have done much better than expected. The huge buying by the Fed has to be cited as one of the key reasons for strong equity markets since it has pushed investors out on the risk curve.

Anyone care to comment on the risks here? Can the Fed just hold the long term securities until maturity as a way out of Hotel California?


sw
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A number of other commentators have expressed concerns about the ability of the Fed to unwind positions in the future especially for longer term government debt. It would seem that as the economy improves there will be upward pressure on interest rates and selling long term debt securities would be quite difficult without taking large losses. This is in contrast to say buying AIG stock at the bottom and then expecting its prospects to improve as the economy has improved.

In looking at 2012, stock markets have done much better than expected. The huge buying by the Fed has to be cited as one of the key reasons for strong equity markets since it has pushed investors out on the risk curve.

Anyone care to comment on the risks here? Can the Fed just hold the long term securities until maturity as a way out of Hotel California?


Not so knowledgeable thoughts:

1. When your timeframe is "eternal", as most governments think, then you have a VERY long timeframe (25-30 years) to unwind it before those mostly LT treasuries become due. In the short term, being at retirement for me and close to retirement for DW, I'd be happy to buy LT Treasuries and even annuities based upon annuities if the interest rates made any sense at all.

2. Best case scenario probably is both moderate inflation AND high employment/GDP. Thus you unwind the revenue side through taxes and increased productivity, while paying back debt with cheaper dollars.

Fix the tax and expenses situation and you probably have several years of a horrible stock market, but back to some semblance of an efficient market.

3. Much will also depend on the safety of US Treasuries and investment, and the dollar vs other alternatives.

4. I'd love to hear your perspective Denny and others who are not so US-centric, as I am.

5. As reported in a previous post I'm scared of how well I did this year, and the last four. It doesn't make "sense." This does have to "unwind" sometime. [laugh] -- I'm good, but not THAT good!

Bob
RYR Home Fool
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Much will also depend on the safety of US Treasuries...

As an aside

Interesting little analysis I just saw yesterday, showing that
the max&probable upside and max&probable downside risk profile (on a
mark-to-market price basis) of Treasuries at current yields is almost
identical to that of writing naked index puts 25% out of the money.*

Assuming that approximate equivalence is so (it looked about right to me),
the conclusion is clear: if you think either one of those is too risky, don't do either.

Jim
* A little bit worse, actually, since the puts assumed repeatedly written
ones which would compensate for inflation over time, which the bonds wouldn't.
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Interesting little analysis I just saw yesterday, showing that
the max&probable upside and max&probable downside risk profile (on a
mark-to-market price basis) of Treasuries at current yields is almost
identical to that of writing naked index puts 25% out of the money.*


Adding a little "cheer" to the season?????? ;-)

I wonder in what year that analysis started looking like that. I (of course) got out of long-term treasuries in 2009, got in briefly after reading a story by Shilling and made good money, got scared and sold, and would have made a TON of money had I not sold. Just what IS Bernacke's capacity to "sell" his "puts" to the public????

Seriously, thank you VERY much for all your contributions over MANY years on MANY Boards! For me and mine, your work is gratefully accepted, acknowledged and THANKED!

Hockeypop ... listening to Grandma and DW arguing about how to cook something and also grateful I'm upstairs in the "Man Cave." Opps, got to go to the store to even out the argument somehow.
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Treasuries at current yields is almost
identical to that of writing naked index puts 25% out of the money.*
...
Adding a little "cheer" to the season?????? ;-)


Well, it's a cheery observation if you're among those smart enough not to own Treasuries!

Note, I actually expect yields to stay quite low, and often lower than this,
for most of the next several years as deflationary pressures remain dominant.
But I would never bet money on that. The upside is nonexistent, and
the risk of a bond panic is ever-present.
If you want to park money in something cash-like, use cash.
Nothing besides cash (including very short dated notes) is like cash.

Don't reach for yield in fixed income, live with the zero on offer for now.
Nothing worse than an asset that's "good until reached for".
And it bears repeating, "More money has been lost reaching for yield than ad the point of a gun."
(Raymond DeVoe, Jr.)

Almost nothing but equities and cash make sense these days, and I'd hold my cash in a variety of credible currencies.
The number of bonds and preferreds that have yields commensurate with their risk is pretty low.

Jim
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