Two weeks ago, I published an article entitled "In September, We Usher In The Era Of Limitless Money Printing." Mario Draghi and Ben Bernanke have spoken and it has indeed come to pass. On the one week anniversary of the ECB's commitment to buy limitless amounts of sour short-end Spanish and Italian sovereign debt, the Fed spoke and QE3 has arrived in the form of open-ended purchases of mortgage backed securities at a clip of $40 billion per month going forward. From the Fed:
"The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions...To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month."
Amusingly, this means that Goldman hit the ball out of the park with this prediction from last week:
" ...QE3 will be formulated as an open-ended [MBS] purchase program of around $50 billion per month"
In any case, investors should take note of the extent to which the Fed now dominates the MBS market. As UBS noted last week, over the past 12 months, the supply of 15-, 30-, and 30-year GNMA has averaged only $85-90 billion per month. The Fed already buys around 30% of those, so add in the new purchases from QE3 and the Fed is taking down somewhere in the neighborhood of 75-80% of the monthly supply. Indeed, one wonders why they even bothered announcing this given the current rate of purchases. Readers are reminded that, as SoberLook notes, the substantial decline in the Fed's holdings of MBS since 2010 is due to the natural decline of principal balances associated with a rise in prepayments as home owners refinance, not to the selling of assets. The balance leveled-off after the FOMC directed the New York Fed to begin reinvesting principal repayments into new purchases of MBS:
Source: Sober Look
The Fed then, is already purchasing MBS with every dollar of principal repayment it receives. As such, QE3 is just the normal course of business on steroids.
The bottom line here is that unless you believe that the ECB truly intends to sterilize all its potential bond purchases (indeed they might be unable to do so if the past is any indication), we have entered a parallel universe in September where money does indeed grow on trees. This of course, provides support for the argument that investors should buy gold (GLD) to hedge against a decline in the value of fiat currencies. Need proof? GLD rose nearly 3% in just one hour following the Fed's announcement.